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Sunday, April 12, 2015

Short Term Energy Outlook

The deal with Iran could drop prices by $5-15/bbl according to the US government agency EIA. That's according to notes in their Short Term Energy Outlook (STEO). They say:

On April 2, Iran and the P5+1 reached a framework agreement to guide the next three months of negotiations, which will target a comprehensive agreement by June 30. Under the framework, U.S. and European Union nuclear-related sanctions (which includes oil-related sanctions) will be suspended after the International Atomic Energy Agency verifies that Iran has complied with key nuclear-related steps. If a comprehensive agreement that results in the lifting of Iranian oil-related sanctions is reached, then this could significantly change the STEO forecast for oil supply, demand, and prices. However, the timing and order that sanctions could be suspended is uncertain. In addition, the pace and volume at which more Iranian oil can re-enter the market is uncertain and depends on how quickly Iran can move oil out of storage and ramp up production.

In this STEO, EIA's forecast of oil supply, demand, and price is mostly unchanged from last month. Given the preliminary nature of the recent developments, EIA has not changed its short-term projection for Iranian production, which assumes that production will stay close to the current level. However, if a comprehensive deal is reached, the re-entry of more Iranian barrels could result in a $5-$15/bbl lower baseline STEO price projection in 2016 compared with the current STEO.

Iran is believed to hold at least 30 million barrels in storage. It is possible that Iran will attempt to move oil out of storage more quickly sometime during the second half of 2015 in preparation to increase production if discussions on sanctions show progress. As a result, the global market may see incremental increases in Iran's crude oil exports before seeing a substantial increase to Iran's production, but the pace at which oil in storage could be withdrawn is uncertain.

EIA believes that Iran has the technical capability to ramp up crude oil production by at least 700,000 bbl/d by at least the end of 2016, of which 600,000 bbl/d represents capacity that was previously shut in and 100,000 bbl/d is new capacity. EIA's current STEO projects that growth in global inventories declines from 1 million bbl/d in 2015 to 100,000 bbl/d in 2016. If Iran ramps up production by 700,000 bbl/d by at least the end of 2016, then this could result in an annual average growth of about 500,000 bbl/d in global inventories in 2016, which would stress storage capacity limits and put downward pressure on prices. The potentially large inventory build in 2016 implies that production growth outside of Iran could be lower or that global consumption growth could be higher than projected in the current STEO.

Although the timing and volume of Iran's exports remain uncertain, the market perception surrounding increased future supplies will apply downward price pressure to near-term crude oil prices. Overall, North Sea Brent crude oil prices could be lower by about $1-$3/bbl in 2015, decreasing the 2015 annual Brent price from the current projection in the high $50/bbl range. If and when significantly increased volumes of Iranian barrels start entering the market, the price effect could be greater. The uncertainty of the impact lies in the secondary effects on production outside of Iran, including in the United States, as well as any increases in global consumption as a response to lower oil prices, among other factors.