Iran to Become Oil Superpower

Brian Hicks

Written By Brian Hicks

Posted November 26, 2013

For over half a century, the U.S. has had a special eye on Iran – so much so that the CIA and British intelligence played a hand in overthrowing democratic Prime Minister Mohammad Mosaddegh and replaced the deposed leader with the autocratic Shah of Iran in 1953.

This served Western interests, but things changed with the Islamic Revolution in 1979, which saw the removal of the Shah. Between Ayatollahs coming into power and the Iranian hostage crisis, tensions between the U.S. and Iran have been frayed throughout the decades, and relations have only gotten worse with word that the Shia nation may be developing a nuclear weapon.

iran gasThis has sparked geopolitical tensions like the world has never seen before, with threats from Iran to shut down the Strait of Hormuz and Western vows of military action if the conservative Islamic nation did not halt suspected nuclear aspirations.

The stakes have never been higher. But hints of peace are beginning to loom.

The Iranians will not concede this in the open, but Western sanctions have essentially crippled nearly every facet of their economy – most notably their energy sector. Iran has invested heavily in compressed natural gas to compensate for lacking oil output.

Iran’s energy economy has suffered an annual $50 billion loss, and oil production has lowered to around two million barrels a day – half of what it was just a decade ago. This has allowed Iraq to become OPEC’s second largest producer, with Iran taking a third seat. And if it weren’t for Iraq’s political and social ills, the land known as the Cradle of Civilization could very well surpass Saudi Arabia in oil output.

But things could change with a recent deal between President Obama and new Iranian President Rouhani regarding Iran’s nuclear capabilities.

The terms of the deal are as follows:

Sanctions will be eased on Iran’s precious metals, auto sector, and energy field, but oil-based sales will remain capped at 1 million barrels a day for the next six months. Iran will continue to lose $25 billion in lost energy revenue, but the easing of sanctions on these sectors will provide Iran an additional $1.5 billion.

In addition, $4.2 billion worth of assets will be repatriated back to the Persian nation. And $400 million will also be given to schools with Iranian students studying abroad.

In return, Iran is required to reduce enriched uranium by 20 percent and stop centrifuge installation, Bloomberg reports. The full force of all sanctions will return if Iranian leaders do not hold their end of the bargain.

The deal gives Iran some breathing room, but the West still holds most of the cards.

But if Iran makes further concessions and follows through on these terms, this could open the door to easing more restrictions, and it could lead to the Persian nation reclaiming its energy mantle.

So what would this to do the world market?

World Oil Prices

The markets reacted to news of the deal, with Brent prices falling to around $108 on Monday at the idea of more Iranian oil flooding the markets in the future and the prospect of lowered geopolitical tensions in the region.

But oil already gained back to $111 at the end of Monday’s trading, with WTI at $94.09 – one of the widest gaps we have seen between the two benchmarks this year.

Brent’s higher price can be attributed to production disruptions in Libya, but prices could lower if these nuclear talks are finalized. Prices are already falling in North America as the U.S. and Canada continue record production.

If all goes smoothly with the deal, we could see 1 million barrels a day of Persian crude coming back to the market by 2014. That’s enough to fulfill world demand growth for 2014 alone, ABC News reports.

With more oil supply and decreased tensions, expect oil prices to decline further – but only if more progress is made between Iran and the West. The Iran deal will mostly have an effect on Brent crude, with little effect on U.S. oil production, at least for the time being.

As of now, the price drop was a mere reaction to the news and may not be an indicator of how oil trends will go in the future.

But let’s say Iran is able to return to its pre-sanction oil production in the next five to ten years. According to some analysts, the U.S. will be ready to export shale oil in the next five years, and a fully energy-capable Iran could pose more competition for American exports.

Developing economies like China and India will create more demand, and OPEC’s conventional crude will cater to these nations. China, South Korea, India, and Japan already consume oil from Iran.

All of these nations were forced to cut imports from Iran due to Western pressure, but this could change if sanctions are eased to a greater extent.

When it comes to exports, the U.S. will have enough problems dealing with Saudi Arabia’s cheap conventional crude. Iran’s return as a major producer would pose serious competition for U.S. companies desiring to ship to markets in Europe and Asia.

And Iran will eventually pose the same problem for Saudi Arabia.

Even though Iran is an OPEC partner of the Kingdom, the love-loss between the Sunni Saudis and the Shia Persians has been no secret. It is one of the reasons why Saudi Arabia wanted the U.S. to intervene in Syria – in order to flush out Iran’s influence from the fractured nation.

A fully productive Iran would also force the Saudis to lower production, and this would not be good news for OPEC, considering Saudi Arabia has already cut production in reaction to shale oil production in North America. Worse, the Kingdom is losing influence over Iraq. The Shia-led Baghdad government is getting cozier with Iran, and Iraq is planning to increase oil production by six million barrels a day by 2020.

Let’s also add the Kurds to the mix. The provisional region of Iraq also plans to boost oil output despite objections from the southern government.

And Iran’s impending return could also pose problems for the Russians, who are hoping to make more of an energy imprint in the Asian market. A thriving Iran would be a thorn in the side of many.

But others see opportunity.

Where to Invest?

With news of this deal, certain oil companies are salivating at the idea of investing in Iran, and with good reason. Iran comes in 9th with its oil reserves, and the nation could be sitting on 150 billion barrels of oil. There are also claims that Iran has the world’s largest gas field, CNN reports.

Total (NYSE: TOT) CEO Cristophe de Margerie would like to see Iran offer a better investment climate, and other companies share this sentiment.

But this assessment may be premature, since there’s no telling where this temporary deal will end up in the future. Even if Iran begins making more concessions, sanctions will continue to exist in some form for a long time.

In terms of investing, you’re better off with shale oil in the U.S. and Canada.

Approaching the nuclear deal with a bit of caution is ideal, especially since the Middle East is still a turbulent area to place a stake in.

The Bakken and the Eagle Ford are obviously good investment areas, but pay special attention to the Permian Basin of West Texas and its Cline Shale region, along with promising plays like the Niobrara and the Mancos.

Iran could be a barrier when it comes to U.S. oil exports, but producers that would like to ship abroad may face a tougher time with Congress and government bureaucracy. Domestic production, however, will remain insulated from world events going forward.


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