Iran hopes to return to full oil production as quickly as possible, but this could lead to a cut in output from Opec members, or risk a flood of crude on the global market
As Irans relationship with the rest of the world begins to thaw, there is real hope in Tehran that it can start to rebuild its economy on the back of increased oil revenues.
There is evidence the Islamic Republic is winding down its uranium enrichment programme and its nuclear ambitions are being put on hold. If this can be maintained, it can only be a matter of time before the US withdraws its sanctions against anyone who conducts oil transactions with Irans central bank.
Iran has traditionally exported about 2.5 million barrels a day (b/d) of oil, but this has fallen to about 1 million b/d since 2012. Tehran hopes it can return exports to pre-sanction levels as quickly as possible.
An extra 1.5 million b/d of crude coming onto the international market will have serious implications for several Middle Easts oil producers, most notably Saudi Arabia.
The kingdom is the worlds swing producer and has often been called upon to fill gaps in global supply. Riyadh is generally happy to produce about 8 million b/d of oil, but the past two years has seen that figure rise to almost 10 million b/d to make up the shortfall from Iran.
Relations between Iran and Saudi Arabia are cool and some of Riyadhs political elite believe it should not have to excessively curb its current production to accommodate Tehran.
This leads to two possible outcomes: Riyadh will be under pressure from Opec to decrease production to 8 million b/d to allow Iran to return to its pre-2012 export levels; otherwise, it could refuse or make a more modest reduction.
If the first course of action is followed, there is a real chance oil prices would not fall too drastically and could still hover around the $100 a barrel mark by the end of the year. If the second option is taken, the resulting glut of crude would trigger a significant drop in the price of oil.
It is still too early to predict either outcome, but hopefully pragmatism will prevail and a mutually agreeable solution can be reached.
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.