Iran’s oil could stall U.S. drilling recovery

Deadline near on possible agreement to lift economic sanctions on crude-rich nation

Iran and six Western nations may be within days of a deal that could put Iranian crude back onto international markets — a development that could end two months of stable $60oil.

Iranian officials in Vienna are closing in on a self-imposed Tuesday deadline to form a pact with the United States and other world powers that would lift economic sanctions on Iran, in place since 2011, in exchange for constraints on its nuclear program.

Analysts say a successful nuclear deal could allow the Islamic republic, which has the world’s third-biggest oil reserves, to empty 700,000 barrels of crude a day into the market, which is already swooning under the weight of a global crude glut worked up by U.S. shale oil producers.

World wide, daily crude supplies came in at 96 million barrels a day in May, while international buyers demanded less, 93.3 million barrels a day in the first half of 2015, according to the International Energy Agency, a Paris-based organization with 29 member countries excluding OPEC nations.

The return of Iranian crude could upset the fragile market equilibrium that has kept oil prices at a manageable level for most U.S. oil companies since the endof April.

“Oil prices could be dampened for some time,” said Jeff Dietert, an analyst at Simmons & Company International, a Houston investment banking firm that expects oil producers to erect 340 drilling rigs over U.S. shale plays over the next 2½ years. “I don’t think it’ll be severely dampened, but effectively, the (U.S. shale) recovery could be pushed out six to nine months.”

The modest drilling rebound that Dietert’s firm forecasts would mean the return of less than a third of the 1,071 drilling rigs that have been shut down since the most recent peak of U.S. drilling in October, according to Baker Hughes.

But if Iran has its nuclear deal, it could be a while before oil producers see the $65- to $70-a-barrel price tag for U.S. crude that could rouse significant shale drilling again, and even that mild recovery could be delayed, analysts said.

In April, the same month Iran reached an initial framework agreement with Western nations on the nuclear pact, the Energy Information Administration said an influx of Iranian oil could push crude prices down by $5 to $15 a barrel by next year.

Still, almost everything about Iran, its oil and how the deal is or isn’t shaping up remains a mystery. Analysts can’t agree on how fast Tehran’s leaders could put crude back on the market. Many believe the 700,000 barrels could come to market in 6 months; others say it could take up to 2 years.

Many agree there could be an early burst of Iranian crude exports as sanctions are eased. Because sanctions have restricted Iran from selling all the oil it has pumped out of the ground for three years, it has “built up a significant bunker of floating storage,” a quantity that will likely be subject to the terms of any agreement, said Mark Finley, BP’s chief economist, at an event in Houston last week.

“The Iranians themselves have said, ‘Well, we can produce about half a million barrels per day pretty quickly,’” Finley said. “And then shortly after that, ramp up to the full pre-sanctions level of output.”

In a joint report, energy research firms Wood Mackenzie and Verisk Maplecroft last week took a more conservative view, saying they believe Iran has the capacity to sell 600,000 more barrels a day by 2017, with just 120,000 of those barrels coming to market by the end of this year, if a deal is even reached. The analysts said they don’t think it’s likely a deal will emerge from the Vienna negotiations.

“Despite the growing momentum of talks, nuclear negotiators still have to reach a consensus on the outstanding issues of disagreement,” they wrote in the report. “Agreeing on a timetable for the lifting of sanctions and the parameters of the inspection regime will be particularly challenging.” Missing deadline?

It wouldn’t be at all shocking if Iran and its Western counterparts missed the deadline, said Phil Flynn, an oil analyst at Price Futures Group in Chicago. Still, news of the deal, whether it comes on or after the Tuesday deadline, could act as a ceiling for current oil prices in months to come, said Andy Lipow, president of Lipow Oil Associates in Houston.

“If you saw the U.S. and Iran come to an agreement with a gradual easing of the sanctions, it would put pressure on the markets because they’d know more oil is coming on,” Lipow said.

Big Oil seems to believe Iran and the five permanent members of the United Nations Security Council, along with Germany, will come to an accord — a situation that could potentially lead them to pour billions into the country.

Royal Dutch Shell executives “recently met Iranian officials in Tehran,” spokeswoman Kelly op de Weegh said in an email, to discuss, among other things, “potential areas of business cooperation should sanctions be lifted.” Italian oil major Eni has also sent executives to meet with Iranian officials, according to the Financial Times. ‘Hedge that bet’

“They see there will be a chance the sanctions will be lifted, and they want to hedge that bet,” said Kent Bayazitoglu, head of the energy market analytics group at Houstonbased Gelber & Associates. “Maybe it is a sign that things are softening between Iran and the Western world.”

An anonymous U.S. official told Reuters on Thursday the negotiators are willing to work on the deal after this week’s arbitrary deadline to hammer out the details of the agreement. Citing the official, Reuters reported the timing and scope of lifting the sanctions are some of the biggest sticking points left in the talks.

Bloomberg reported U.S. Secretary of State John Kerry and Iran’s foreign minister, Mohammad Javad Zarif, were slated to continue negotiations over the weekend in Vienna.

The EIA said last week that Iran’s daily crude exports have fallen from 2.6 million barrels in 2011 to 1.4 million last year, after sanctions took effect and Iran’s biggest buyers turned to other crude suppliers in the Organization of the Petroleum Exporting Countries, the 12-nation cartel that pumps a third of the world’s oil. It re- mains to be seen whether the other OPEC members will welcome Iran back into the fold by curbing their output. OPEC nations

Saudi Arabia and other OPEC nations aren’t likely to yield market share in coveted Chinese and Indian markets to make room for the return of Iranian oil, even though that’s the usual protocol for the group when a nation regains its place in the world market, said Jeff Colgan, an assistant professor at Brown University who studies global energy politics.

“Some people think the Saudis might reduce their oil production to try to stabilize the price while Iran is increasing theirs. I tend to disagree with that,” Colgan said. “They say they want to defend their market share — they’re not going to cut production to support the price.”

In the U.S. oil patch, EIA analyst Grant Nülle said, producers are seeing a period of relative stability, and as the costs to drill a well come down, $60 oil is much more bearable than the $43 a barrel that the U.S. bench mark crude saw in March.

But it’s not quite enough to get a big number of drilling rigs going again, at least for a while: analysts say $65 to $70 a barrel is the point at which U.S. producers can go from surviving to thriving. Iran’s deal could keep that out of reach.

“$60 oil is enough to get producers interested and focused on what they might do, but it’s not resoundingly pushing them into the camp of re-accelerating drilling,” said Dietert, the Simmons & Co. analyst. “Most producers say about $60 to $70 oil is needed to restart activity. We’re suspiciously stuck at the bottom end of that range.”