IEEJ：July 2015

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (228)

July 17, 2015

Iranian Nuclear Deal’s Implications for International Oil MarketKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn July 14, Iran and a group of the five permanent United Nations Security Council
members and Germany, known as P5+1, announced that they reached a final agreement on acomprehensive solution to the Iran nuclear development issue after negotiations based on theirframework agreement (Lausanne Agreement) in April. Tensions had long continued between Iranand Western countries since the revelation of Iran’s suspected nuclear development in 2002 as
Western countries had gradually enhanced their sanctions on Iran that had stuck to asserting its rightto the development and use of nuclear energy. After their Geneva agreement in November 2013presented a path to a diplomatic solution to the issue, however, Iran and the P5+1 group continued
difficult negotiations before reaching the final agreement. In fact, the deadline for the finalagreement was originally set for the end of June. The deadline was extended three times. Evenbeyond third time extension of the deadline to the July 13, they continued intensive, energetic
negotiations. As a result, they coordinated differences over the sanctions on arms exports to Iran andother problems left for the final stage of negotiations, achieving the final agreement at last.
The final agreement features four key points: (1) Iran’s uranium enrichment and otherrelated activities will be strictly restricted to limit its nuclear development capacity; (2) theInternational Atomic Energy Agency will confirm pending matters before the implementation of theagreement; (3) the United Nations and Western countries will lift economic sanctions on Iran as theagreement is implemented; and (4) sanctions will be restored if the agreement is broken. As for the
first point, they agreed to cap Iran’s nuclear development capacity by banning Iran’s production oracquisition of highly enriched uranium over the next 15 years and reducing the number of Iran’scentrifuges as well as by other related measures to extend the period of time required for producing
nuclear materials for a nuclear bomb from two or three months to more than 12 months.
The final agreement indicates that the P+1 group and Iran have made a major diplomaticachievement to stave off nuclear proliferation in the Middle East by restricting Iran’s nuclear
development realistically and easing overall tensions. Given the agreement’s international impacts
including a possible major change in U.S.-Iran tensions since Iran’s Islamic revolution and Iran’s
expanding presence in the Middle East, the latest pact is very significant. Bur close watch may haveto be kept on a large number of matters including whether this agreement would actually be
implemented, how domestic U.S. and Iranian discussions would develop on the agreement and how
U.S. allies Israel and Saudi Arabia would respond to the agreement.
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However, the latest Iran nuclear deal will lead to new developments involving Iran. In thisrespect, one of the future developments that would attract global attention would be Iran’s comeback
to the international oil market through the termination of the sanctions. The international oil market
has seen a substantial price plunge since the second half of 2014 due to a sharp expansion in U.S.
shale oil production and the policy of Saudi Arabia or the Organization of the Petroleum ExportingCountries tolerating a price decline. Crude oil prices still remain low, ranging between $50 and $60
per barrel. Recently, the Greek debt crisis and concern about China’s economic growth deceleration
have exerted further downward pressure on oil prices. Under such situation, the possibility of Iran’s
comeback or additional supply to the international oil market has emerged as a key matter of concern
to oil and energy experts in the world.
In fact, Iran’s crude oil exports declined by 1.20 million barrels per day from annual
average of 2.61 million bpd in 2011 to 1.41 million bpd in 2014. How fast Iran would come back to
the international oil market and how much crude oil Iran would add to the international market will
have great impacts on the global oil supply and demand environment and crude oil prices. In thisrespect, the first clear point at present is that Iranian crude oil would not come back to theinternational market immediately after the latest Iran nuclear deal. Given that economic sanctions on
Iran are to be lifted after the agreement’s implementation is verified, Iran may have to wait until theend of IAEA inspections before coming back to the international oil market. Various views exist
about how long the IAEA inspections would continue. But the IAEA inspections and report arewidely expected to take at least three months, indicating that the sanctions could begin to be lifted
late this year at the earliest. So, Iran may begin then to come back to the international oil market.
As well as when Iran would come back to the international oil market, how much Iraniancrude oil would be added to the market is a major issue. In fact, experts are widely divided over theissue. While Iran itself has indicated that it would be able to expand oil supply by some 1 million
bpd, investment shortages and oilfields’ aging under the sanctions have led some observers to expectthat the expansion within one year would be limited to 300,000 bpd. The most common projection of
the expansion may be 700,000-800,000 bpd for 2016. But there are various uncertainties about theexpansion.
But even Iran’s additional supply between the lowest forecast of 300,000 bpd and themedian forecast of 700,000-800,000 bpd may exert some impact on the market under the presentsituation. A particularly important point is that it would not be easy for Iran to secure sales outlets for
its crude oil at a time when oil demand is weak in Europe and Asia that had been major customers
for Iran. Of the abovementioned 1.2 million bpd decline from 2011 in Iran’s oil exports, Europe
accounted for a half. It may be difficult for Iran to restore that amount under the current European
market environment. Furthermore, Saudi Arabia, Iraq and other major oil producing countries havetaken a policy of maintaining or expanding supply, making it more difficult for Iran to increase oilexports. As a result, Iran’s comeback to the international market could further intensify oil producing
countries’ race to secure market share.
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The price-reducing pressure of Iran’s comeback to the international oil market depends
largely on how fast Iran would come back and how much crude oil Iran would add to the market, asnoted above. It may also depend on the overall supply-demand environment at the time of thecomeback. If Iran comes back to the market when the supply-demand balance is loosened due todownside economic risks, an oil price decline may be accelerated. In a reverse case, the impact of
the comeback may be minimized. The U.S. Energy Information Administration has forecast that if
Iran expands crude oil output by 700,000 bpd in 2016, crude oil prices may fall by $5-15/bbl.
Depending on the supply and demand environment at the time of the comeback, however, thedecline could be greater. We may have to closely watch the Iran issue’s implications for theinternational energy situation, including Iran’s introduction of foreign investment even before thetermination of economic sanctions and the fate of medium to long-term oil and gas production
expansion.

Contact: report@tky.ieej.or.jp
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