Iran deal — death knell for the Opec ceiling?

This week, the US government will try to secure a deal that could add up to 1mn b/d of crude to an already saturated market.

The deal is not being done by the energy department, nor is it being done in cahoots with any US oil company. The deal in question is a by-product of what increasingly looks like an agreement with Iran on its contentious nuclear programme. The deadline for agreement is just weeks away.

Today, US secretary of state John Kerry is in Geneva to meet Iran’s foreign minister Mohammad Javad Zarif.

Success in the talks could mean the lifting, either in part or in full, of the sanctions that have diminished Iran’s place in the oil market. So long have these negotiations been in process that allowing Iran back into the crude market was once thought to be a way of easing high global prices. Now the same outcome could further deflate crude from its diminished levels and apply still more pressure on, particularly, the domestic US industry.

And it would certainly give cause for a wholescale revision of supply models, at a time when the world is awash with crude. In the US alone, storage is nearing capacity, with 434mn bl of crude in tanks — the most in 80 years.

Nothing is certain, of course. Mistrust and suspicion remain the defining traits of the US-Iran relationship. Last week, Kerry, who has been active in the talks with Iran for some time, accused Tehran of meddling in Yemen. Iran in turn destroyed a replica US aircraft carrier near the strait of Hormuz.

Even if an agreement is thrashed out, this won’t mean a flood of Iranian crude will immediately come onto the market. As European trading firm Gunvor’s market research and analysis chief David Fyfe told Argus last year, the effects of sanctions mean it will be problematic for Iran to get field production back up to pre-sanction levels quickly. IEA data show Iran’s shut-in production at a steady 600,000 b/d for the past 12 months.

The fall in oil prices since June last year may be a factor in forcing an agreement. Iran expects to get $40/bl for its crude exports in the 2015-16 Iranian year, which begins on 21 March. This translates in terms of currency to as little as $3bn, compared with $13bn when crude was changing hands at $100/bl.

The IEA, in its Medium-Term Oil Market Report, identified the potential lifting of sanctions on Iran as an exception to its expectation of forthcoming elevated supply risks. Any Iranian return would, of course, make a mockery of Opec’s agreed 30mn b/d production target, and would contradict Iranian calls for the organisation to cut output. And all this just as Saudi Arabia has decreed that the market is calm once more with Brent at around $60/bl.

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