Iran nuclear deal to see $20 oil if Tehran floods crude market

Flights to Tehran from Dubai have been crammed in recent months with Western executives flooding into the Iranian capital ahead of a potential lifting of economic sanctions, The Telegraph reported.
Potentially one of the Middle East’s biggest economies, Iran has been frozen out by the West over its refusal to give up its aspirations to become a nuclear power. But a binding deal that would bring the Islamic state in from the cold appears tantalisingly close as negotiators thrash out terms in talks being held in Lausanne, Switzerland, over the weekend.
In terms of commodities, the biggest impact that a resumption of normal economic relations with Iran will open up is in the oil industry.
Tehran is a sleeping oil giant, which has been frozen out of international markets and denied access to key technology and investment that could lead to a massive surge in its potential to produce oil and gas. The country holds 9pc of the world’s proven oil reserves and a nuclear deal that could open up its fields to foreign investment is potentially game changing for the industry.
With oil prices continuing to come under pressure from an estimated 2m barrels per day of excess supply sloshing around international markets, any significant increase in Iranian output could easily trigger a further rout in prices. The price of a barrel of crude has fallen 50pc since last June to trade around $50 per barrel but and agreement in Lausanne to restore Iran back into the international community could easily trigger a further sell down towards levels around $20 per barrel.
Ahead of the Lausanne talks, Iran’s oil minister Bijan Namdar Zangeneh said that the country could easily increase production by 1m barrels per day (bpd) within months of sanctions being lifted. Under the current terms of the economic sanctions designed to bring Tehran to the table the country’s oil exports are restricted.
“In case the international sanctions against Iran are lifted, 1m barrels a day will be added to the country’s crude-oil production and exports in several months,” Mr Zanganeh has said in recent weeks.
Output is currently around 2.7m bpd of which 1m bpd is exported. The figure is a long way from its production levels prior to sanctions. According to BP, the country was capable of pumping over 4m bpd in 2011. Despite its significant reserves of oil and gas some analysts question the country’s ability to increase output significantly over such a short period of time.
Charles Robertson, chief economist at Renaissance Capital has said: “After years of low investment, we doubt Iran can suddenly flood world markets with oil: the last time it produced more than the 2011 peak of 4.4m bpd was in 1978.”
However, the country may not have to increase output in order to immediately boost exports following a deal. Some estimates suggest that the company has between 7m and 35m barrels of crude in storage that could be immediately placed for sale on the international market were a deal to be achieved before the rapidly approaching April 1 deadline.
Long term a return of international oil majors to Iran will be required to significantly boost output for a sustainable period of time. Oil majors such as Royal Dutch Shell and Total have previously been active in the country and would undoubtedly return quickly if sanctions were lifted and acceptable oil development contracts could be negotiated.
One significant barrier to a major increase in Iran’s oil output could be its membership of the Organisation of Petroleum Exporting Countries (Opec). The 12-member cartel, which controls a third of the world’s oil supply, maintains a quota system that Tehran would have to negotiate. It’s unlikely that Saudi Arabia would be willing to support any increase in Iranian exports, which sets up a tense meeting of the group’s ministers when it next meets in Vienna in June. By then a barrel of oil may already be selling for $20.