Oil markets shouldn't worry about Iran's comeback

Don’t expect a sudden surge in oil on the world market now that Iran and six world powers have agreed on a deal to limit Tehran’s nuclear program and lift years of crippling sanctions.

Bijan Namdar Zanganeh, Iran’s oil minister, said during the OPEC meeting in Vienna on June 5 that his country will move quickly to restore its status as a major oil exporter once the deal is signed, beginning with an export increase of 400,000 barrels per day and adding 600,000 more barrels per day within six months.

And just after the deal with Britain, China, France, Russia, the United States and Germany on July 14, Zanganeh tweaked that forecast, saying Iran would begin by exporting 500,000 barrels a day, an amount that would grow by an additional 500,000 barrels in six months.

Either way, that adds up to 1 million extra barrels a day to the oil market. But the process can’t begin until the agreement is signed. That won’t come until early 2016 at the earliest because the U.S. Congress has two months to study the arrangement, then vote on whether to reject the deal championed by the Obama administration. Sanctions probably won’t be lifted until the end of the year if all goes according to plan.

Both houses of Congress, though, are controlled by opposition Republicans, most of whom already have declared their opposition. Already, House Speaker John Boehner (R-Ohio) has said, “[W]e’ll do everything we can to stop it.”

Even if Congress votes to kill the deal, Obama says he’ll trot out his veto, which could be overridden only by a two-thirds vote of both the House and the Senate. Mitch McConnell (R-Kentucky), the Senate majority leader, also opposes the agreement and predicted that the president will “work hard to get the 34 votes that I know he knows he needs in order to sustain” his veto.

Iran once was OPEC’s second-largest oil producer after Saudi Arabia, with output of 3.6 million barrels per day in 2011, an amount that’s declined to about 2.8 million barrels per day because of the sanctions. Current exports are 1.1 million barrels per day, half of what they were before the sanctions.

Another delay can be attributed to the International Atomic Energy Agency (IAEA), the United Nation’s global monitor of nuclear activity. IAEA Director General Yukiya Amano says it won’t issue its report on Iran’s compliance with the agreement until Dec. 15. If it finds a gap in the compliance, Obama has promised that the entire agreement, including the lifting of sanctions, would be void.

So perhaps Zanganeh is jumping the gun a bit about the speed of Iran’s rebound in the global oil market. One independent oil analyst, Gary Ross, the executive chairman and head of global oil at the New York-based Pira Energy Group, said, “It should take a good year between the day they sign the agreement and when they add 500,000 barrels of production a day,” he told The New York Times.

Yet, Ross concedes that no matter how quickly – or slowly – Iran restores its export potential, the global market should be able to absorb it without too much trouble. Today there are about 1 million more barrels of oil on the market than customers need, but he notes that the demand has been gradually rising, especially in Asia.

As a result, Ross says, Iran’s goal of eventually adding 1 million barrels per day to the export market shouldn’t be much of a problem. “With each day, the market will be in a better position to accommodate the incremental Iranian oil.”

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