Syed Rashid Husain Finally, after months of labor, the deal is delivered. And courtesy the deal, Iran's sanctions regime is set to begin winding off - over the next few months. It carries the capacity to alter the global crude market fundamentals. However, the full impact of the deal on crude markets is still to be ascertained. The debate is on. It will weigh bearish on the markets - for that's certain. Yet when and to what extent, is still not clear. US National Security Advisor Susan Rice said if Tehran complied with the terms of the deal and sanctions were lifted in “many months,” new oil flows from Iran would not hit the market all at once, but were likely to reduce global oil prices at least for a period of time. Others too seem agreeing. The deal would definitely weaken oil prices, but not just yet, Goldman Sachs underlined. In a note to clients, Goldman analysts predicted that the lifting of sanctions will be bearish for oil, though the effects won't be seen until 2016. “The timeline of the various steps required to reach such sanction relief suggests that Iranian oil flows will continue to remain capped until 2016, consistent with our expectation.” Goldman analysts however did concede that oil supply is at risk of being too high in 2016, because previous estimates had “conservatively assumed no increase in Iranian flows.” Plus, other OPEC members have already increased their production, exceeding Goldman's initial 2016 forecast, and even bringing risk to second half of 2015 forecasts. The Paris based International Energy Agency thinks Iran could raise production by between 600,000 and 800,000 barrels a day ‘within months' of sanctions being lifted. Early indications suggest the sanctions impacting oil sales will be lifted following a positive report from the IAEA may be as early as December 2015, the Boston- based Consulting House ESAI said in a memo issued on July 14. Iranian crude oil hitting the market would have no “significant” effect on short-term prices but it would have an impact in the long run, Fadel Gheit, of Oppenheimer told CNBC. Iran would be able to raise crude oil output by 250,000 to 500,000 bpd by the end of this year and by up to 750,000 by mid-2016, a Reuters poll of 25 oil analysts from leading banks and brokerages forecasted. With global output of 90 million barrels per day, the influx is “not really going to change it very much,” Gheit emphasized. Meaningful volumes of Iranian crude will only hit markets in mid to late 2016, underlined Azlin Ahmad, crude oil editor at Argus Media. “After years of under investment and aging fields, Iran's spare production capacity could be as little as around 200,000 barrels a day, although that could increase to 500,000 by the end of 2016. It's going to take some time for Iran to ramp up its production.” But the markets are definitely getting ready for an immediate injection of additional Iranian crude into the markets - courtesy of millions of floating barrels. Iran is reported to have large volumes stored in supertankers at Iranian ports - ready to be shipped at short notice. What is the exact volume of these floating volumes is difficult to say. Some estimates put it at around 35-40 million barrels. “The impact of sanctions relief on Iran's production would likely initially be a draw-down of floating storage and an increase in production of several thousand barrels per day,” Goldman analysts hence underlined. A gradual increase in Iran's oil exports would start with the drawn down of the Islamic Republic's floating storage of 20-40 million barrels, once the sanctions are lifted. This would be followed by a jump in (Iranian) production, which Goldman says could lead to a 200-400 kb/d increase in Iranian exports in 2016. While higher crude exports from Iran are expected by the first quarter of 2016, ‘there would be some leakage, between now and then, from the 35 million barrels of crude oil in floating storage,' the ESAI July 14 memo too had emphasized. And while the oil markets await a final decision on the impact of deal, perhaps the most important implication of the deal is, that, it sets the stage of an OPEC Grand Bargain (for output quotas), late in 2016, cites ESAI, the Boston-based energy consultancy. Others too seem agreeing. Iran is clamoring to double its crude exports soon after sanctions are lifted and is pushing other members of the Organization of the Petroleum Exporting Countries to renew the cartel's quota system. As parties began positioning themselves, a few months earlier in anticipation of the deal, Iran began taking the position that once the sanctions are lifted, it's exports would reach 2.3 million bpd, compared to around 1.2 million bpd today. Iranian Oil Minister Bijan Zanganeh has been insisting for last several months that Iran could add a million barrels to daily oil output “within a few months” of sanctions lifting. At the OPEC ministerial last June, he informed other OPEC ministers that his country's production would increase (significantly) if sanctions are lifted, suggesting the output quota regime needed to be reinstated. However, Saudi Oil Minister Ali Al-Naimi was of the view then that the output boost shouldn't be discussed until it materializes and ruled out the return of immediate production allocations, WSJ said quoting senior officials. Iran's Deputy Oil Minister for Planning and Supervision Mansour Moazami also told the Wall Street Journal; that Iran was already in contact with former oil buyers in the European Union - traders such as Vitol Group and big oil producers such as Royal Dutch Shell PLC, Total SA and ENI SpA - as well as existing importers in Asia to help absorb the potential new shipments or invest in new fields, once the sanctions are lifted. To some all this pointed to taking positions for the looming, grand quota bargain within the OPEC - some day - in not too distant a future. In the meantime, with Saudi Arabia ramping up its output to 10.6m bpd in June, an increase of more than 200,000 b/d on the previous month, David Sheppard of Financial Times, referred last week to various theories in circulation for this upsurge in Saudi output.
