While our article on Tuesday said the “Iran agreement is almost done”, in the morning hours the historic news started spreading from Vienna. The agreement, which will limit Iran's nuclear activities, promised removing many sanctions in exchange. However, the weapon embargo, which is the most problematic clause I've previously underlined, stayed the same.
Now, everyone is curious about what's going to happen after this nuclear agreement. Of course, the interests and conflicts are different for everyone. The cold hand shake, which Obama identified as the “new direction in relations with Tehran”, is a “historical mistake” according to Israel. While the German business world is rubbing their hands in glee, Saudi Arabia is brooding over it. While France says “we are interested in your market”, Pakistan's dreams are decorated with pipelines.
As for the leading actor, Iran; they are consoling themselves with economic awards in exchange for giving up on nuclear power. Being integrated into the international finance system is the most satisfying award. Because, this gain will enable Iran to open a brand new page in their commercial and investment relations.
As for the other essential gain that will be provided to the Iran economy by the agreement, it's without a doubt; petroleum… Iran's petroleum exportation, which was showing a sharp recession due to sanctions, will find the change to resurrect, following the signatures appended in Vienna.
Then, how will this potential development affect the petroleum prices, which were upside-down last year? This is one of the questions keeping the markets busy the most. Then, let it keep our article busy as well.
What will happen to the prices?
While the petroleum prices entered a recession trend in the second half of 2014, it followed a rippled course after seeing the bottom levels towards the beginning of 2015. The developments, which are shaped with strong supply and relatively weak demand, are not pointing at a different display in the near future. Especially, as long as the wealth on the OPEC side is not cut, no critical declination is expected in supply. As for the demand side; according to the estimations of the International Energy Agency (IEA), an acceleration loss is presumed in 2016. Thus, we can expect the petroleum prices to present a wobbly display, while not growing stronger for a while.
Now, Iranian petroleum will be included in that display. Then, step by step, let's think over the possible effects of the agreement over the prices. Naturally, in the first step, the agreement needs to be activated. As a matter of fact, when we look at the related processes in the clauses, it's understood that this could only happen towards the end of the year. When this is actualized, the “implementation day” will be activated, and only after that day, Iran and related shareholders will be able to act freely. Not just for petroleum; this is valid for all topics.
Will production immediately increase?
Now, the 2nd step; let's say that Iran desires to begin their petroleum exportation to the markets as soon as the implementation day arrives. Right at this point, we have to think about “how much extra petroleum can they export?” Yes, Iran is the 4th country in world, in terms of possessing vast petroleum reserves; however, for a long-time they've been producing quite below their capacity. Let us recall that many petroleum fields were left inactive due to sanctions. Within this context, Iran's crude petroleum production, which was 4 million barrels daily back in 2008, is around 2.9 million barrels in the present time. As a result of this, the exportation regressed to 1.1 million barrels a day.
Then, Iran petroleum's flow rate to new markets, on and after the implementation day, will depend on Iran's capability of increasing this level. At this point, the first support will be provided from the stocked petroleum. In the existing state, Iran presumably possesses around 40 million barrels within this context. On top of that, it's not like all of this quantity will be released in an instant. The stock in question can be sold within 6 months, including the additional quantity. This might have a downside pressure on the global prices.
Of course, by the way, Iran might have to put an intense effort into entering new markets. In the end, we are talking about a market that is quite satisfied in the recent period.
The fields need to wake up
As for the 3rd step…. Iran's, who will liquefy all its petroleum stocks immediately after the implementation day, actual effective shot will be related with how they will increase the production. In this sense, while it's necessary to restart the work in inactive fields, this task will also require money and investment. Thus, the pace of foreign investments, which are focused on Iran, in going down to those fields, will be effective within this context.
It will take time before reaping the fruits of these developments; however, an increase can be provided in the first stage. According to the International Energy Agency (IEA); it's presumed that Iran can increase its daily production, which is around 2.9 million barrels, up to 3.5 million barrels in a short time. As for the expectation within 5 years; it's 4 million barrels…. Besides, based on the possible contribution of the investments toward searching and drilling activities, this number can move in the upside direction. If we are to look at Iran's claim; it's possible to reach 4 million barrels in a short time.
Within the context of these presumptions; we can expect the effect of the nuclear agreement over the petroleum prices to be limited. Because Iran will not choke the world markets with petroleum quickly. Thus, we can say that the downside effect, which will be created by Iran, will be more perceivable in the oncoming periods of 2016.
On the other hand, let's also state that the developments in OPEC, other producers and shale petroleum, will be creating different balances in prices. Especially, the policy of the OPEC members after the “Iran” development will be important.
There are many more details related with the agreement; however, today we already overflowed our article with just petroleum. In short, by making concessions on their rights over nuclear power, Iran regained their petroleum potential. As for this and other economic liberties; they gave great hope to the community. Let's put it this way; Iran is experiencing two religious holidays at the moment.
On this opportunity, I'd like to celebrate the Ramadan holiday of our valuable readers, and wish them many more religious holidays on these lands with peace and unity.