Iran trades nuclear for oil

  • Rise in oil capacity significantly surpasses demand trends.
  • Oil prices appear increasingly fragile and dependent on consumer subsidies.


After five days of negotiations, Iran finally came to an agreement with the United States, China, Russia, the United Kingdom, France and Germany, committing to suspend its nuclear weapons program. Hassan Rouhani, elected president in June, has thereby confirmed his reputation as a moderate. As for the world powers involved, they have promised to reduce the economic sanctions imposed on Iran since 2005. In particular, Teheran will be permitted to once again import airplane parts and cars, which will be viewed as good news by Peugeot and Renault, which were both very active in Iran until recently.


As for oil, the West simply pledged to not introduce any new sanctions, enabling Iran to continue exporting at its current pace, which was enough to knock a few cents off the fossil fuel’s market price.


This weekend’s compromise represents a first step, with negotiators foreseeing a more in-depth agreement if all parties manage to respect their commitments over the next six months. However, Iran appears to have little room to maneuver in terms of actually increasing its exports – a rise of 0.5 million barrels per day (mb/d) is expected in a global market that produces 90 million mb/d. Over the longer term, the lifting of all Iranian sanctions should allow the country to improve its facilities and consequently return to 1970s production levels of 5-6 mb/d, versus barely 3 mb/d at the moment.


Supply on the rise

That being the case, this would add to the development of production observed in other countries, starting with the Americas, where the exploitation of non-conventional deposits has become widespread.


In the north, Canada has specialized in oil sands. In the south, Brazil has become a veritable Eldorado for offshore oil exploration. In the United States, meanwhile, the boom in oil shale should enable the nation to again become the planet’s biggest oil producer from 2015 onward, with a production of 11 mb/d, according to the International Energy Agency (IEA).


In the Middle East, the end of successive conflicts in Iraq has finally enabled the country to rebuild the infrastructure required to exploit its huge oil potential. The Iraqi government is counting on production levels of 9 mb/d by 2020 versus a little over 3 mb/d currently.


The oil supply is therefore expected to increase overall, with global capacity likely to reach 103 mb/d by 2018 according to the IEA, which has taken into account a drop in production in Iran. Demand, however, has not increased as quickly as expected since 2007, rising from 86 to 91 mb/d. Medium-term and long-term projections have also been the subject of considerable downward revisions.


Last year, oil consumption hit a ceiling of 90 mb/d, although the IEA had, prior to the economic downturn, predicted a demand of 97 mb/d for 2012. That figure is unlikely to be attained before 2018, and the IEA is now forecasting a global consumption figure of 101 mb/d in 2035.


In other words, this means that the level of worldwide oil production is largely sufficient and that price trends will depend on the producers (including OPEC, through its quotas), possible geopolitical tensions and the behavior of authorities in oil consuming countries.


The oil industry is therefore taking a cautious approach. At the beginning of the year, Helle Kristoffersen, senior vice-president of strategy and business intelligence at Total, predicted that the price of crude oil would remain around $100 over the next decade, a slight drop in nominal terms, but a significant decrease when inflation is taken into account.



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