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Further Depression of Oil Price Looms

Fears that introduction of one million barrels of Iranian oil into the already saturated crude market would force further depression of oil price, peaked Tuesday – the self-imposed deadline by involved parties for a deal to lift sanctions on Iran.

The marathon negotiations have been going on for some time now between Iran and foreign ministers from six world powers restrict Iran’s nuclear programme in exchange for relief from crippling sanctions.

The fact is that there is every likelihood of the deal going through as there is a possibility of further extension of the deadline, since it was self-imposed.

There is no sign that the most intractable problems, such as the pace and timing of sanctions relief, have been resolved, the BBC reported from Lausanne the venue of the talks.

 

However, other reports said there were plans to issue a joint statement on general points of agreement, accompanied by documents outlining more technical details.

 

These would be enough for all parties to continue negotiations aimed at achieving a comprehensive accord in June.

Although nuclear weapons proliferation is the headline item, one of the most significant side effects of the negotiations will be their effect on the price of oil. Iran, as a member of OPEC and a major oil producer on the world stage, still has substantial influence on oil markets.

 

Oil producers are still producing more oil than the world can handle, with around 1.5 million barrels per day in excess capacity.

 

Iran hopes to bring an additional 1 million barrels per day back online in the coming months if a deal can be signed, a volume that would crush oil prices. The prospect of permanently lowering tensions with Iran – especially in light of the Saudi attack on rebels in Yemen – would also push down prices substantially. If the West and Iran can reach a deal anytime soon, oil prices could lose an immediate $5 per barrel, according to analysts at Societe General.

 

It is unclear how quickly Iran could resuscitate its decrepit oil industry even if sanctions are removed. Iran has large oil reserves, but the severing of its relationship with international financial markets has scared away investment, and its major oil fields are in need of maintenance and rehabilitation.

But it appears that the need to remove sanctions and boost oil output has contributed to Iran’s willingness to consider a deal. Iranian President Hassan Rouhani has sought to woo international oil companies to move back into Iran as they may be the key to increasing oil production.

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