Potential Iran Nuclear Deal Clouds Outlook for U.S. Oil Producers

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. crude oil producers, already reeling from an over-supplied global market, received more bad news earlier this month when the U.S. Energy Information Administration (EIA) (Washington, D.C.) said a nuclear deal with Iran could increase global oil supplies by up to 700,000 barrels per day (BBL/d) and lower crude oil prices by $5 to $15 per barrel by the end of 2016.

Iran has an estimated 30 million barrels of crude oil in storage, the EIA said. The U.S. is leading negotiations with Iran aimed at preventing that nation from acquiring nuclear weapons in exchange for ending international sanctions that have, among other things, sharply curtailed Iran's ability to export crude oil. The parties recently agreed to a framework for a comprehensive deal, and are aiming to conclude negotiations by June 30. A deal that ended crude-oil sanctions against Iran could bring some of those barrels to market, though EIA was unsure how many could be brought to market over what timeframe.

The EIA forecast, contained in its Short-Term Energy Outlook (STEO) released April 7, acknowledged its assessment had a high level of risks and uncertainties. Among them was the possibility that negotiations with Iran could collapse, or that the U.S. Senate might not approve any treaty with Iran. Senate leaders have voiced disapproval of the talks in general, and have threatened to veto any treaty it is presented. The U.S. Constitution required a two-thirds Senate majority to ratify treaties with foreign governments. President Obama recently backed away from his assertion that a deal with Iran was not a treaty and therefore did not require Senate approval.

Picture Dims for Global Demand
There is little chance that demand growth can rebalance global supply and demand in the near future. China recently reported its lowest rate of quarterly economic growth in six years. The Chinese economy grew 7% for the just-completed first quarter, well under prior years' growth rate. China's gross domestic product (GDP) grew 7.4% in 2014 and 7.7% in 2013. The Indian economy, another large consumer of oil, expanded 7.5% in the October-December 2014 period, and experts predict a similar rate of growth for the January-March 2015 quarter.

Weakening demand and burgeoning supplies have left the global oil market glutted, EIA noted. Even without Iran's production, the global market is oversupplied by about 2.2 million BBL/d, it said April 7. The main contributors to the over-supplied market are the Organization of the Petroleum Exporting Countries (OPEC), mainly Saudi Arabia, and the U.S. Looking forward, the agency also identified potential production gains from Iraq later this year as another factor weighing on crude oil prices. Despite ongoing battles with the Islamic State, Iraq's crude-oil production increased by about 600,000 BBL/d in late 2014, reaching 3.75 million BBL/d in December, its highest-ever level. Further gains are expected this year.

Click on the images at right to see the EIA's estimate of how much OPEC's crude-oil production exceeds demand, and the top five nations contributing to an over-supplied global crude-oil market.

Global oil inventories rose by 1 million BBL/d last year, and the EIA projected inventories will rise by another 1.7 million BBL/d for the first half of 2015. If a deal to end Iran's oil sanctions is reached and ratified, it could "significantly change" the STEO forecast for oil supply, demand and prices, the agency noted.

Continued crude-oil inventory growth at the hub in Cushing, Oklahoma, is another factor dragging down U.S. crude oil prices, the EIA noted. Inventories at Cushing rose to 58.9 million barrels on March 27, a record. The monthly average spot price for West Texas Intermediate (WTI) crude oil fell to $48 in March, down $3 per barrel from February. For all of 2015, the EIA predicted an average WTI price of $52 per barrel, $7 per barrel less than Brent. For 2016, the agency forecasted WTI prices at $70, which is $5 per barrel under Brent.

"However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events," the agency cautioned.

Since bottoming at 5 million BBL/d of production in 2008, widespread use of hydraulic fracturing ("fracking") and horizontal drilling sharply increased U.S. crude oil production to an average of 8.68 million BBL/d in 2014. In its April 7 STEO, the EIA predicted continued production growth, reaching an average of 9.23 million BBL/d this year and 9.31 million BBL/d in 2016.

Click on the image at right to see the recent history, and projected future, of U.S. crude oil production.

The number of oil drilling rigs in the U.S. fell 238 in March, to 1,110, according to Baker Hughes Incorporated (NYSE:BHI) (Houston, Texas). That followed a monthly decline of 335 in February, the company said. However, as producers deploy new techniques and technologies, they are finding ways to produce more oil with fewer rigs. Exactly how a declining rig count will affect domestic crude oil production will become evident in the next few months, analysts believe.

"All indications are that U.S. crude oil producers will face a difficult 2015 and 2016, unless there are dramatic changes in global supply, global demand, or both," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "We all know how rapidly things can change in the Middle East, so changes in supply may happen faster than changes in demand. Still, for U.S. producers carrying heavy debt loads, we see a painful near-term future as prices stay below many companies' production costs."

Industrial Info's subject-matter experts will discuss slowing Oil & Gas capital spending and drilling activity and how that is affecting downstream industries like Petroleum Refining and Chemical Processing at the upcoming 2015 Market Outlook & Networking Event, which is to be held May 6 at the Trump International Hotel & Tower in Chicago, Illinois. The briefing is complimentary but advance registration is required.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.