Iran’s return to oil markets puts additional pressure on oil prices

Iran’s return to oil markets puts additional pressure on oil prices

The end of sanctions is a lifesaver for Iran’s economy, but oil producers will have to bear the additional brunt as new barrels flood the already oil-saturated markets.

After seven years of international sanctions, Iran is once again free to export its vast oil reserves to the world markets. The decision to lift the sanctions did not come at the best of times. The price of oil is currently at its lowest levels since 2003, and it seems that the period of low prices will continue for some time. Although this will starve Tehran of some oil income, Iran is determined to return to pre-sanctions levels of production and exports as soon as possible.

Things are not so simple though. In a world awash with oil, Iran will have to fight hard for its place under the sun, primarily with its regional arch rival Saudi Arabia and other oil exporting countries being determined to preserve their market positions. In addition, years of isolation and a lack of investment have severely affected the country’s economy and oil infrastructure, which requires strong injections of fresh capital.

As a result, Iran currently produces around 2.5 million barrels per day (mb/d), and exports about 1.1 mb/d, which is around half its pre-sanction levels. The Iranian government is keen to increase the production immediately by 500,000 barrels per day, and by another 500,000 over the next seven months.

According to some sources, Iran already has 50 million barrels of crude oil stored in tankers moored in the Persian Gulf that are ready to steam their cargo across the globe, primarily in Asia and Europe.

Exports to China are of particular importance for Iran’s stalled oil production. China was among the few countries that were allowed to import Iran’s crude during the sanctions regime, and Beijing is keen to strengthen political and economic ties with Tehran in the post-sanctions period.

A recent visit by Chinese president Xi Jinping to the Middle East coincided with the outburst of Saudi-Iranian animosities over the execution of the Shia cleric Nimr al Nimr. The key purpose of Xi’s visit to Tehran was to enhance economic cooperation, but also to underpin Chinese interests in preserving the region’s stability. Beijing is highly dependent on oil imports from the Gulf, with 52% of its oil imports coming from the region, and any disruption would severely damage Chinese economy.

The China National Petroleum Cooperation (CNPC) is already involved in developing the Yadavarab and North Azadegan oilfields in South Iran, which will play an important part in the government’s plans to boost production by additional 500,000 barrels per day. In addition, the two countries are expected to increase bilateral trade to $600 billion over the next decade.

Increased exports to China and other Asian countries, Japan and South Korea in particular, might also make Saudi-Iranian cooperation within Opec thornier. Over the past several years, other countries, such as Iraq, Angola, Colombia and Russia, have challenged Saudi Arabia’s leading position in oil exports to China. Adding Iran to the list will not help alleviate the already difficult relationship, and it might additionally contribute to Opec’s further global decline.

The return of Iran to the markets will undoubtedly add further pressures on oil prices, and potentially postpone the recovery. Both Iran and Saudi Arabia are against production cuts, but for diametrically different reasons. While Riyadh aims at preserving its market share with unrestrained production, Tehran is seeking to return to the markets lost due to sanctions.

Although a direct conflict between the two Gulf powers is not a realistic option, the oil war between Riyadh and Tehran, with its consequences for the global crude prices, will add a new devastating element in the already sour environment for both oil economies and producers.

About Author

Ante Batovic

Ante was previously a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was also a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a master’s degree in Global Politics from the London School of Economics and a PhD from the University of Zadar.