Source: Intermodal Shipbrokers
August 6th 2015
On July 14th, 2015 a historical consensus was reached in Vienna between Iran and the five permanent members of the U.N. Security Council, plus Germany, to eliminate Tehran’s nuclear program in return for lifting international oil and financial sanctions. The US-Iran deal is the most important breakthrough in their bilateral relationship since 1979, when the Iranian revolution disturbed their relations. In particular, Iran has agreed not to produce any plutonium enriched weapons and additional heavy water reactors for 15 years. The assurance that Iran is satisfying the deal’s commitments will be granted through an extensive UN inspection and observation under the International Atomic Energy Agency (IAEA). It is discussed that assessments and transparency measures may remain in place for as long as 25 years. Expressly, President Obama stated that “this relief will be phased in. Iran must complete key nuclear steps before it begins to receive sanctions relief.”
The markets are already looking towards the challenges, options and prospects that will emerge with the deal being signed. Notably, oil prices fell due to investors’ expectations of an increase in oil exports from Iran to an already oversupplied market. It is estimated that Iran could supply an extra 200k-400k bpd of crude in 2016 on top of a release of 20-40 million barrels from floating storage. The NIOC Managing Director states that if there is enough demand, it is estimated that production could increase by 500k-600k bpd reaching its pre-sanctions level of four million bpd within six to 12 months. Furthermore, China’s economy is witnessing a growth slow down, while global oil production is close to record highs and thus traders weigh the risk of oil prices possibly falling further.
Furthermore, the agreement will gradually benefit companies that transport Iranian Oil. Once the EU ban on insuring tankers carrying Iranian crude is lifted, imports to countries such as India and Turkey will be comforted and will promote the purchase of contracted volumes. Iran has traditionally been India’s second-largest supplier of crude oil and the prospect of lifting sanctions will also facilitate Pakistan to complete the Iran-Pakistan pipeline. Moreover, it would again be legal for P&I insurance clubs and companies that cover shipowners for several risks to insure Iranian oil cargoes.
Likewise, it is estimated that lifting petrochemical sanctions will permit $1 billion in exports for Iran. The increase in Iranian supplies of oil and gas would trickle down to Europe’s chemical industry, creating a potential game changer for energy-intensive businesses. A traditional player is coming back into the market and preeminently needs to sell, therefore chemical plants of Europe will definitely benefit. Energy companies from Royal Dutch Shell to BP commented after the deal was signed that they were examining their options in a post-sanctions Iran, where production and export potential could expand with the appropriate investment strategies.
Decades of sanctions have inevitably affected the local population and Iranian political setup. With the prospect of sanctions being lifted, Iran’s economic potential will allow for numerous opportunities not only for Iran but also for the wider region, which will directly translate into an increased influence in the Middle East. More importantly, the deal will have some prompt and long-term influence both on global and regional level. The deal will bring out Iran from international isolation. Nevertheless, Iran will have to wait for almost a year to yield the financial returns of the deal, while the six major world powers will most probably reap the benefits of the lower cost of oil immediately.