Lifting of Iran sanctions could have major impact on global oil balance

With the US working toward a nuclear deal with Iran, lifting Iranian sanctions could have a significant impact on the global oil balance. If sanctions are lifted, as much as 1 million more barrels of oil per day could enter the global supply by the end of 2016. With supply levels from Saudi Arabia unlikely to decrease during that period, Thomson Reuters Oil Research & Forecasts predicts a 13% drop in the average Brent spot price in 2016 if Iranian oil re-enters the market.

Continued supply concerns in the US, which have kept the West Texas Intermediate (WTI) price depressed relative to Brent, are likely to shield the American crude market from a depression in Brent spot price.

Thomson Reuters predicts 2015 Brent price to average $56.55/barrel due to down price pressure in the second half of the year if Iranian sanctions are lifted. A 2% decrease from the previous 2015 forecast which predicted an average Brent price at $57.86/barrel.

If the deal is done, the primary impact will be felt in 2016 along with a tightening in the Brent/WTI spread from minus $8/b to minus $5/b on average in 2016, as the market attempts to price in new supply ahead of actual barrels arriving. In turn, this will tighten trade-month margins for refined products on the East Coast (PADD I), and likely widen spreads between New York Harbor and US Gulf Coast refined product markets.

Current expectations are that the earliest Iran can begin deliveries will be December, with volumes limited to approximately 200,000 b/d due to the technical requirements of restarting shuttered fields. Volumes are expected to scale up over the next 12 months to approximately 900,000 b/d.

Joshua Starnes, director of Oil Research, Americas, at Thomson Reuters, commented, “Introducing another million barrels per day into the currently oversupplied global market will depress Brent, lengthening the timeline for price recovery and compressing refinery margins in the US.”

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