Vienna will host discussions with major ramifications for global energy markets this week. Not Opec’s next meeting – that is scheduled for November 27 – although officials at its headquarters are no doubt burning the midnight oil as they seek to deal with the current slump in crude prices. Instead, this is the gathering of Iran, the United States and European Union as they seek to make progress ahead of the fast-approaching November 24 deadline for a deal over Tehran’s nuclear programme.
Since an interim deal was reached on July 24 to ease some sanctions in return for restrictions on uranium enrichment, the situation has developed in ways favourable and unfavourable to Iran.
On the one hand ISIL’s rampage through northern Iraq and Syria has continued, making the US and Iran de facto allies in propping up the Baghdad government and the Iraqi military.
On the other hand, oil prices have plunged, with the key European marker, Brent, falling below US$90 per barrel to its lowest level since December 2010. The global economy and oil demand are tepid, the US shale boom continues apace, Libyan production is rising despite the country’s deepening political crisis and the Arabian Gulf Opec countries have not yet decided on production cuts.
Iran’s petroleum export earnings, which dropped from $115 billion in 2011 to $62bn last year as sanctions bit, could well be less than $50bn next year. This puts more pressure on Tehran, and makes a deal more vital. It also means that – even while the Ukraine crisis drags on – the US and EU can be more relaxed about oil markets. Iranian crude does not seem as essential as it did a few months ago.
If a deal is reached in Vienna, a million barrels per day of Iranian oil could be back on the market within a few months, putting further pressure on crude prices. In the longer term, Iran, whose capacity has probably fallen to about 3.2 million to 3.4 million bpd of crude oil, has aspirations to reach 4.5 million bpd – although this requires major foreign investment and is unlikely before the early 2020s. Such a gain would be a significant challenge to its Opeccolleagues, particularly if Iraq’s output also rises despite insecurity and bureaucracy.
The Europeans are also deeply interested in Iran’s gas reserves, the largest or second-largest in the world. As a European Commission source told Reuters: “Iran is far towards the top of our priorities for mid-term measures that will help reduce our reliance on Russian gas supplies”, a suggestion Russia was suspiciously quick to rubbish.
On the other hand, if the talks collapse or become moribund, we could expect an intensification of US-led sanctions, reducing Iranian exports back below 1 million bpd. That would slightly ease Opec’s task in Vienna of stemming the slump in prices.
But the most likely outcome seems to be modest progress, enough to justify a further six-month extension in talks, with some sanctions relief traded against further restrictions on nuclear activities. That would keep the sword of Damocles of Iran’s oil hanging over the markets, and it is likely that exports would creep up as some buyers, notably the Chinese, became bolder in advance of an anticipated final deal.
The core Arabian Gulf Opec countries – Saudi Arabia, Kuwait and the UAE – have enjoyed an easy ride over the past three years. Oil prices were high, and their major competitors within the Organisation – Iran, Iraq, Libya, Venezuela and Nigeria – progressively neutralised themselves by insecurity, mismanagement and political problems.
Now things are not so comfortable. The Viennese, used to hosting diplomacy, will see Opec ministers as well as western and Iranian negotiators struggling to escape one of the oil market’s thorniest questions.
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