Friday, April 12, 2024

Market Extra: This chart shows how long it could take Iran to get its oil production up to speed


Oil prices sputtered along on Monday, as the beaten-down commodity market began adjusting to the harsh new reality of Iran’s inclusion in the global oil production fold.

As expected, economic and financial sanctions on Iran came to an end on Saturday evening for that country’s work on curbing its nuclear-related infrastructure. It’s a moment that oil traders and investors have been dreading for months and comes as U.S. oil is down 20% year to date, on the heels of a 31% plunge in 2015. Brent oil is down 22% year-to-date and sank 35% last year.

When the Iran news finally reached the market in Asia on Monday, oil prices plunged, driving Brent crude LCOH6, -0.31%  to $27.67 a barrel. That’s the lowest level for Brent since November 2003, according to analysts at Commerzbank. Prices moved off that level to hover around $29 a barrel in European trading hours. U.S. WTI crude CLG6, -0.85%  also traded cautiously, last off around 11 cents to $28.83 a barrel.

While the Iran news was zero surprise for this market, that doesn’t mean it won’t be an excuse for bears to push oil prices even lower, said analysts. The U.S. Energy Information Administration has forecast OPEC crude production to rise by 500,000 barrels a day in 2016, with Iran expected to make up for the bulk of that rise.

Read: Could this surprising factor save oil from Iran-fueled slide?

With the Iran cat now out of the bag, investors will naturally start questioning how quickly the country will get its oil production back to normal. Naturally, more supply for an already overflowing market couldn’t come at a worse time, Eugen Weinberg, head of commodity research at Commerzbank and a team of analysts, said in a note on Monday.

Weinberg said the prospect of additional oil from Iran will put the brakes on a recovery for oil in the foreseeable future. However, it shouldn’t be such a weight on oil given that the market should have already priced in the prospect of a “realistic” 500,000 barrel per day increase in Iranian oil shipments, he said.

Weinberg said it’s unlikely Iran’s production volume will see a significant, sharp increase this year. “After all, Iraq and Libya took roughly twelve months to regain their original production levels following the wars in 2003 and 2011 respectively,” and Libya was only able to restore its production levels for a short time.

Here’s the chart from Commerzbank laying out the process of production normalization for those countries:


Iraq, Libya may offer clues to Iran’s production ramp-up

Something else that may keep Iran from putting its foot to the floor on production: its inability to invest in its oil infrastructure for several years now. Therefore it will take “more, rather than less time for oil production to normalize,” said Commerzbank’s Weinberg.

In observance of the Martin Luther King Jr. holiday, U.S. stock and bond markets are closed on Monday. Oil futures will trade via Globex through the New York morning, but then all trading will be halted from 1 to 6 p.m. Eastern Time.


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Author: Red

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