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Could a Nuclear Deal With Iran Threaten the US Shale Oil Boom?

By    |   Tuesday, 24 March 2015 03:55 PM

With Secretary of State John Kerry and Iranian officials going into overdrive to try to reach an agreement on Iran’s nuclear capability, much of the discussion has centered on the political ramifications of a potential deal.

But should an agreement be reached in the coming days, it also figures to have profound implications for the world’s oil market, with some energy experts concerned it could jeopardize the U.S. shale oil boom.

"If Iran was able to export crude [in much greater numbers], then we would absolutely see a price response," Nicole Leonard, analyst at Bentek Energy in Denver.

Some analysts have already predicted an additional drop of $10 a barrel should a flood of Iranian oil hit the market.

"We would see that producers wouldn’t be able to continue to produce, and you would see a lot of producers struggle to continue to do business," Leonard said in a telephone interview with Watchdog.org.

That could mean that some U.S. producers — already under stress by the recent global price plunge — may shut down.

"I certainly think there’s a possibility they could, if prices get even lower than they are today," Leonard said.

"Could oil go to into the low $40 range or the 30s? Sure," said Tom Petrie, chairman of the banking firm of Petrie Partners, which gives financial advice to oil and gas interests. "Could it take a bounce back to something like $50 or a little better? Possibly."

As of Tuesday, a barrel of oil was trading at $47.96 for West Texas Intermediate, the benchmark price for the U.S., and $56.01 a barrel for Brent crude, the international benchmark.

Petrie isn’t as pessimistic as Leonard, saying that U.S. producers can survive at lower prices — to a point.

"In order for the U.S. to shut in production of any magnitude — more than a few hundred thousand barrels a day — you’ve got to take oil under 30 [dollars a barrel]," Petrie said. "If oil goes under 30 and stays under 30, I fully agree with her."

The Iranian government, listed by the U.S. State Department as a state sponsor of terror since 1984, has been subject to economic sanctions by Western nations, including the United States, for years. In 2012, sanctions aimed at Iran’s central bank hit the government especially hard.

The holder of the fourth-largest crude oil and second-largest natural gas reserves in the world, Iran used to export 2.5 million barrels of crude a day. But since the 2012 sanctions by the U.S. and the European Union, the amount has dropped to about 1 million.

If the sanctions were lifted, Iran could increase its oil production to 500,000 to 800,000 barrels a day "within three to six months," Sara Vakhshouri, an energy consultant who once worked at the National Iranian Oil Company, told Canada’s Financial Post.

According to the Institute of International Finance, the Iranian economy figures to contract by 1.2 percent without a deal, but it could jump 5 percent with one.

Lifting sanctions on Iran "would put significant price pressure" on lower global prices, Leonard said.

That’s good news for drivers, as lower global oil prices equals even lower prices at the pumps.

"In the short-term, yes, it’s good news in that we would see prices at the pump fall," Leonard said. "But our economy is going to struggle with world oil prices. You see that already. There are so many different sectors that are affected by low oil prices."

For example, a further drop in the price of crude would mean more pain for states such as Texas, Alaska, New Mexico, Louisiana, Oklahoma, and North Dakota, which count on oil and gas revenue to help pay for their state government spending.

The domestic steel industry is also hurting from the fall in oil prices.

Steel was experiencing a much-needed rebound by making the tubing needed for oil and gas drilling. But with rig counts down since the first of the year, a steel mill in Lorain, Ohio, was idled, and laid off 614 workers.

A lot of the fallout from a potential nuclear deal with Iran depends on its details.

If lifting the sanctions is dependent on rigorous enforcement of the specifics of an agreement to ensure the Iranians don’t cheat, the effect could be blunted, giving the global oil market time to adjust to the Iranian influx.

But Iran has a history of blocking United Nations inspectors at its nuclear facilities, and that makes some international analysts leery.

"I guess I’m one who’s pretty skeptical of Iranian good faith," said Ted Kassinger, a former State Department attorney and deputy secretary at the U.S. Department of Commerce in 2004 and 2005. "But certainly part of the deal is the extent to which the Iranians agree to inspections and other verifications of their compliance of the agreement."

Then there’s the question about how Saudi Arabia would react to a Iranian nuclear deal with the West.

The Saudis — whose population is largely made up of Sunni Muslims — have long been Iran’s political rival in the region. Iran, which has a largely Shiite population, has backed rebel fighters in Yemen, which borders Saudi Arabia.

The Saudis were instrumental in the decision by the Organization of Petroleum Exporting Countries, or OPEC, in November to keep its production levels unchanged. As a result, the move accelerated the downward trend in global oil prices.

Starting the year with an estimated $750 billion in foreign currency reserves, Saudi Arabia — along with a host of other Persian Gulf OPEC members — have largely insulated itself from the subsequent price drop.

But other OPEC countries, such as Nigeria and Venezuela, have been decimated, and the prospect of even more oil flooding the market from Iran will put their respective governments under even more pressure.

"The Saudis and the rest of the OPEC players are feeling the effects," Petrie said in a telephone interview. "How much longer they want to have that is an open question. It’s hard for me to imagine we go all of 2015 and some of 2016 without that changing."

The deadline for a Iranian nuclear agreement was set for March 24, but officials extended it as late as next March 31.

"The idea of a March deadline is for a framework, far from a final agreement," Kassinger said. "Even if they reach a framework deal, months of negotiations about specifics could break down. So any handicapping is pretty difficult to do."

Rob Nikolewski is the National Energy Correspondent for Watchdog.org. He is based in Santa Fe, N.M. Contact him at rnikolewski@watchdog.org and follow him on Twitter @NMWatchdog.

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With Secretary of State John Kerry and Iranian officials going into overdrive to reach an agreement on Iran's nuclear capability, much of the discussion has centered on politics. But some energy experts are concerned it could jeopardize the U.S. shale oil boom.
Iran, nuclear, deal, US, shale, oil boom, jeopardize, price, pressure, drop, John Kerry, OPEC, Saudi Arabia
Tuesday, 24 March 2015 03:55 PM
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