Will the six month Iran deal trigger a restructuring of the global oil industry, especially the oil rich US fracking sector by driving global prices down under $US80 a barrel?
It’s too early to say conclusively, but already there are analysts lining up to warn of the possibility.
Any fall in the value oil, especially outside the US, would see tremors rattle oil companies large and small.
US oil prices and those for Brent crude in London both fell more than 1% last night in early reaction to the news of the Iran agreement.
But if the extra oil from Iran arrives and prices do fall further, energy costs around the world will decline. That could actually increase deflationary pressures in the US and the eurozone, and remove the major source of Japan’s new found burst of inflation.
If you want to run up a rough list for Australia, it would include BHP Billiton, Woodside, Santos, Oil Search, PetSec, Origin, and a host of smaller players who might be damaged by a price slide to below $US80 a barrel, especially if that price fall was sustained for longer than a quarter or two.
The market here was slow to catch onto the impact of the Iranian agreement – BHP shares edged higher, as did Woodside, while Santos shares were down a touch. The impact though could be slower to be felt.
BHP’s review of its petroleum division and US assets in particular, will have to take account of he changed outlook for oil and gas that the Iranian agreement means.
It could force bigger changes on BHP management.
And, with reports that Asian customers are starting to object to high prices for LNG and are looking for cheaper gas from the US, the deal with Iran, if maintained, will mean added pressures on gas prices.
US producers have chopped gas production and switched to oil and liquids in the past three years because of weak US domestic gas prices.
But there is a link between world oil prices and gas prices, and if the former weakness to under $US90 a barrel for a sustained period, more pressures will be placed on gas producers in America and around the world, especially those producing high priced lNG, as many in Australia are.
But this all of course depends on the Iran deal announced on Sunday being converted into a longer lasting agreement – and without attempts by countries such as Israel and Saudi Arabia from frustrating it, or extreme rightwing members of the US Congress undermining it in Washington in what will be a bitter and divisive mid-term election year.
Both Brent and West Texas futures fell overnight in the first reaction to the news of the deal. That was the initial, kneejerk fall.
But now comes the number crunching and the biggest question of all – how much extra oil will Iran manage to get to market.
Data out last week showed oil exports at a 24 year low in October when they fell 45% because the likes of China, India and South Korea were forced by the sanctions to cut their imports of Iranian crude.
That was so they could maintain access to Iranian crude. It was a carrot and stick approach in the sanctions of forcing cuts to imports to maintain access that seems to have forced the deal.
Provided the new government of Hassan Rohani delivers on pledges to curb its nuclear program (and that’s a big ‘if’), then up to 1.5 million barrels of day of Iranian crude could start flowing onto world markets over the next few months. That would take daily deliveries past 1.5 million barrels.
Iran was exporting 2.5 million barrels a day in early 2012, with the sanctions that fell to 1.1 million barrels of oil a day up to September, but the extra sanctions cut that to just 715,000 barrels in October.
Iran has said it has more than 37 million barrels in storage unable to be exported because of the sanctions.
Normally that should have sent world oil prices higher, especially with the shortfalls from Libya and Nigeria and at times from Iraq. But such has been the impact of America’s production surge, that the impact of those disruptions have been all but offset – increasingly so since mid year as US oil prices have fallen sharply to around $US93 a barrel.
The extra 1.5 million barrels would be equal to around 2% of global supply (which is around 88 million barrels a day).
The extra Iranian crude will help make up the shortfall from less than capacity shipments from Libya and Nigeria which are down by 1.5 million barrels a day.
That shortfall has helped to keep Brent crude prices above those for the standard US West Texas crude – the premium for Brent is currently around $US15 a barrel.
Analysts at Citigroup say the new Geneva deal could cut global oil prices by $US13 over time, enough to depress Brent crude below $US100 and US crude below $US80.
Seeing many US fracking producers have a minimum price of $US70 to $85 a barrel, a sustained fall would pressure many of those to cut costs or curtail production.
Saudi Arabia, which is opposed to Iran, could limit the damage by curtailing its record output – but more of that is going to meet domestic demand for electricity production (even though the Saudis are reportedly boosting gas production).
But more oil is forecast to flow from the US in the next year or so, with the Department of Energy forecasting an extra 1.5 million barrels a day of oil production this year and 1.1 million a day in 2014.
And, new supplies from old sources are starting to flow.
For example, Iraqi Kurdistan, opens a new pipeline to Turkey. Iraq’s output fell to two million barrels a day because of extremist attacks on facilities. Iraqi production is forecast to surge to six million barrels a day by 2020, but that is fantasy stuff given the continuing instability in the country.
Analysts from investment banks Goldman Sachs and Bank of America both warned last week that commodity prices including oil (and gold) will fall 15% or more in 2014 because of a combination of modest demand growth and oversupply.
But all this could fall apart if there is a change of heart in Iran, or the US hardline conservatives get the upper hand in their push for new sanctions.
New oil discoveries off the coasts of Brazil, West and East Africa and in parts of the US deepwater zones of the Gulf of Mexico would be endangered as well by a slide in world prices, as would major gas discoveries off Israel, Cyprus and East Africa.
