International crude oil prices fell to a new 13-year low Monday as the lifting of most economic sanctions on Iran opened the way for it to unload millions of barrels of crude in storage onto a world market already heavily oversupplied.
The lifting of sanctions also means that Iran will be free to attract foreign investment to restore its oil production levels, adding the risk of yet more unwanted barrels hitting the market further down the road. Iran currently exports around 1.1 million barrels a day, and has said it wants to raise exports quickly by another 500,000 b/d.
Some analysts say that’s unrealistic, given the huge backlog of investment needed by the country’s oil industry infrastructure, but Iran is a low-cost producer, meaning that, if it can raise output, it will be more expensive producers (including more of the U.S. shale patch) that suffer more. Charlie Robertson, head of research at emerging markets investment bank Renaissance Capital, said he expects Iran’s output to rise by 750,000 barrels a day this year if sanctions are fully lifted early this year.
The international Brent blend benchmark fell over 4% in Asian trading, after having already lost nearly 14% last week ahead of Iran’s “Implementation Day”. It hit a new low of $27.70 before recovering in the European morning to $28.82 a barrel. Conspicuously, the U.S. benchmark West Texas Intermediate didn’t fall as far, and by 0515 ET was back over $29 a barrel. That’s partly because the extra Iranian barrels are destined overwhelmingly for European and Asian markets, and also because speculative “short” selling, which has reached record levels in recent days, has been concentrated in the Brent contract which is more actively traded in London than WTI.
Analysts have been outbidding each other with bearish forecasts since the start of the year, with Morgan Stanley predicting last week that it could hit $25 or even $20 a barrel. On Monday, U.K. bank Barclays said it had cut its average forecast for this year to $37/bbl.
But there are still optimists. Holger Schmieding, chief economist with Berenberg Bank in Berlin, noted that low oil prices are still an overall positive for the world economy–it’s just that “the travails of oil producers and their financiers make more impressive headlines than the dispersed financial gains of all oil-consuming countries.” But even Schmieding admitted that “oil producers may curtail investment faster than cautious consumers open their wallets.”