How will Iran enter the oil market?

U.S. oil companies are unlikely to rush into Iran anytime soon, even if Tehran secures a deal with global powers this summer regarding its nuclear program, according to analysts.

Iran’s ability to export crude oil has been severely curtailed due to tough sanctions by global powers, but a deal is within reach on its nuclear enrichment program with the so-called P5+1 nations, namely the United States, China, Russia, France and the United Kingdom and Germany. On Tuesday, negotiators pushed a deal date to July 7 to iron out differences.

“It’s crunch time,” says Richard Nephew, who served as the lead sanctions expert for the U.S. team negotiating with Iran “My sense is that we are still looking at a deal in the summer.”

But the lifting of international sanctions would likely still preclude U.S. companies from entering Iran.

“I don’t actually think that this deal will change the U.S. economic interactions with Iran,” Nephew, a former principal deputy co-ordinator for sanctions policy at the U.S. State Department and director for Iran at the National Security Council, said in an interview.

“I don’t think U.S. bilateral embargo is on the table.… A lot of people in Congress would be very upset if it were.”

Non-American companies may conduct business with Iran if a deal is struck, provided they don’t use U.S. technology or personnel, Nephew said.

Officials from oil majors, including reportedly Royal Dutch Shell PLC and Italy’s Eni SpA, have visited Tehran in recent weeks to discuss opportunities. But Citibank believes European energy companies will be reluctant to fully re-engage until there is substantial clarity about the durability of waivers on U.S. Congressional measures.

If President Barack Obama were to substantially give ground on what was agreed in April in order to secure a final settlement, enough Democrats could desert the White House to block the deal in the U.S., notes RBC Capital.

RBC places a 55 per cent chance that a deal will be concluded before the U.S. Congress comes back into session in the fall.

“But the chances that the negotiations could break down is not a black swan scenario (30 percent ) ,” Helima Croft, head of commodities at RBC, said in a note last week.

“At the same time, the negotiations could reach an impasse if (Supreme Leader Ali) Khamenei does not relinquish his new red lines soon after Congress comes back into session. In such a scenario, new U.S. Congressional sanctions would likely be looming.”

Energy consultancy Wood Mackenzie notes Iran is expected to clarify new upstream terms by the second half of the year that are expected to be considerably more attractive than the previous buyback contracts in which returns have “underwhelmed.”

“Western oil and gas companies returning to or entering Iran in the wake of a deal will face a broad range of political and regulatory challenges,” the consultancy said in a note. “These range from an inefficient petroleum bureaucracy to heightened regional tensions.”

While oil markets fear that Iran could unleash about 40 million barrels stored in floating terminals, Citibank estimates 21 million of the barrels are condensates, an ultralight blend of oil, primarily used as a feedstock for chemical manufacturing or for producing motor fuel and solvents. Condensate may also be mixed with heavier crude oil to create a lighter crude oil blend, according to the Independent Petroleum Association of America.

“About one-third appears to be untreated condensate, one-third a blend of crude oil and condensate and one third or 15-20 million barrels crude oil. There are good reasons to believe that much of this is stranded material that can only be sold at a steep discount.”

Iran’s return to the market would likely have repercussions for global markets, and would certainly push prices down as traders brace for more oil flooding the already oversupplied market.

Most analysts believe Iran could raise production by 300,000 barrels per day within three to four months of the lifting of export sanctions and another 200,000 bpd within six months. Iran oil minister Bijan Namdar recently claimed that Iran could bring as much a million barrels per day onstream during that period.

In the lead-up to Iran’s return, other OPEC producers are likely to crank up production, as the battle for market share intensifies within OPEC.

“If Saudi Arabia actually increases production by then and if Iraq continues to grow output and exports, the bearish environment of fall 2014 might well be repeated in late fall or early winter 2015-16,” Citibank said.