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Oil stumbles again as lifting of Iran sanctions adds to market woes

Brent crude falls below US$28; analysts say market yet to hit bottom and Iran will take time to return to market in a big way
Tuesday, January 19, 2016 - 05:50
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Iran's post-sanctions ramp up of crude sales will likely intensify competition among oil producers for a share of the Mediterranean oil market as the country seeks to win back customers it was barred from supplying since 2012, the International Energy Agency said.

Singapore

OIL markets panicked again on Monday as sanctions against Iran were lifted over the weekend, sending the Brent oil benchmark to below US$28 a barrel - its lowest since 2003.

And while many are sceptical over Iran's ability to return to the market in a big way in the near term, with bearish sentiments overwhelming the oil market, a bottom to the oil price has yet to emerge, analysts said.

The US and Europe over the weekend lifted sanctions against Iran after the United Nations' International Atomic Energy Agency confirmed that Tehran had fulfilled its obligations to limit its nuclear programme.

Iran, eager to reclaim its position as the second largest producer in the Organisation of the Petroleum Exporting Countries (Opec), has declared it will raise its exports by 500,000 barrels per day (bpd) as soon as sanctions are lifted; it plans to add another 500,000 bpd in a few months.

The western sanctions had halved its oil exports to between 1.1 million and 1.2 million bpd, and frozen its oil revenue in overseas markets.

Early on Monday, Brent, the international crude benchmark, sank to as low as US$27.72 a barrel, and then recovered to about US$29.04 a barrel by 8.30pm Singapore time. US crude oil futures West Texas Intermediate (WTI) fell to US$28.40 a barrel before climbing again to US$29.33.

Mark Keenan, Societe Generale head of commodity research in the Asia-Pacific, said: "The lifting of sanctions has come earlier than the market was generally been anticipating."

The fall in the oil price was seen as a knee-jerk reaction, as the oil market has generally priced in a rise in Iran's production, analysts say.

What remains uncertain, however, is how much and how fast Iran can ramp up its output; many believe that the country's oil production projections are overly ambitious.

Mr Keenan is expecting the country to lift production by 200,000 bpd each quarter, making up a total of 800,000 bpd, but JBC Energy, a consultancy, estimates that output will go up by only 255,000 bpd over the year to 3.2 million bpd.

In the short term, though, analysts agree that exports will rise as Iran ships out the crude it has been holding in floating storage, estimated to be between 47 and 49 million barrels. But about two thirds of the oil in storage is said to be condensates, an ultralight type of oil, which would not affect the crude oil price.

As the country seeks to regain its position on the oil market, it could do so either by pricing its oil lower, or by finding new customers. A senior executive at the National Iranian Oil Company (NIOC) has told reporters that the country is open to both options.

ANZ commodity strategist Daniel Hynes said: "Iran's likely strategy in offering discounts to entice customers could see further downward pressure on prices in the near term."

However, a price war could risk further straining the already-tense relations between Iran and Saudi Arabia, the other dominant oil producer in Opec.

Victor Shum, vice-president of IHS Energy Insight, said: "An aggressive re-entry strategy could really rile Saudi Arabia further, considering the recent diplomatic spat between the two.

"If that happens we could see a market-share battle out in the open between Saudi Arabia and Iran. That would really be a bearish situation for oil markets."

Iran's deputy oil minister Amir Hossein Zamaninia said on Sunday that the country will boost production and exports in a "managed way to minimise the negative impact" on prices.

NIOC's director-general for international affairs Mohsen Qamsari has also said that the firm will be "more subtle" in its approach and may gradually increase output.

"We don't want to start a sort of a price war," he told Reuters two weeks ago.

Saudi Arabia oil minister Ali al-Naimi said on Monday that he foresees market forces and cooperation among producing nations to lead to more stable markets.

"I am optimistic about the future, the return of stability to the global oil markets, the improvement of prices and the cooperation among the major producing countries," he was quoted by Bloomberg as having said.

"Market forces as well as the cooperation among producing nations always lead to the restoration of stability. This, however, takes some time."

In the long term, if Iran is able to secure the investments necessary to get its oil fields flowing again, it would once again become a large player in the oil-and-gas market.

JBC Energy director Richard Gorry said: "Once the investment is put in place, Iran's potential in the mid- to long-term is huge."

He estimates the country's cost of production to range between US$5 and U$15 a barrel.

Iran has the third-largest reserves of oil and gas in the world, with three quarters of total recoverable reserves yet to be produced, said energy consultancy Wood Mackenzie.

In the near term, however, analysts are expecting more turmoil in the oil market.

ANZ's Mr Hynes said: "The bottom in prices is not expected to be reached until investors decided enough is enough."

He added that this is unlikely to occur until a variety of macro and fundamental indicators turn positive.

"And with Chinese equity markets and the renminbi still vulnerable to further weakness, this doesn't look likely in the short term."

READ MORE: Tanker operators first to gain from Iran's re-entry

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