Iranian oil likely to push prices lower
When it comes to oil, the question becomes how low can prices go.
And with Iran back as a full player in world oil markets, the previously unthinkable — sub-$20-a-barrel crude — is looking more possible.
Iran's oil ministers say they intend to boost their oil production and ship 500,000 barrels a day initially, now that sanctions have been lifted in light of nuclear inspections deal, the Islamic Republic News Agency reported. Iran's goal is 2 million barrels a day.
Eshaq Jahangiri, Iran's First Vice President, said Monday that his nation's oil exports will increase soon and grow further "on a daily basis," the news agency also reported.
The higher production levels alone are big enough to further depress the price of oil, especially since Saudi Arabia has refused to cut its production levels.
The result could lead to oil prices in the mid-$20s a barrel, and with occasional bouts of panic selling, briefly dip into the teens, said Tom Kloza, global head of energy analysis for the Oil Price Information Service.
Oil already plunged past one key threshold last week, falling past $30 a barrel. West Texas Intermediate, the benchmark U.S. crude, closed Friday at $29.42, down $1.78 for the day. Brent crude, an international benchmark, closed at $28.94, down $1.94. The low oil prices are reflected in the price of gasoline, which dipped Sunday to $1.90 a gallon nationally, down almost 7 cents in a week, according to AAA's Fuel Gauge Report.
"The expectation is we're going to plumb new lows. Every oil investor and trader worth his salt has anticipated it," Kloza said.
Even though Iran was under sanctions, it was able to sell limited amounts of oil to a few select countries — China, India and a few other Asian nations. Now, it faces no limitations. Plus, Iran is able to produce oil at lower overall "lifting costs" than many other nations, as little as $10 a barrel. Even when oil prices are absurdly low, it is one of the countries that can still make money.
That puts American producers at a huge disadvantage, pushing many out of the market.
Iran, Saudi Arabia and other big producers within the Organization of Petroleum Exporting Countries are "playing a longer game than our poor guys can play," said Ed Hirs, energy economist at the University of Houston. "We need to step back and take a long perspective on this."
The long perspective is that Iran lacks the kind of oil technology and infrastructure that has led to the resurgence of the industry in the U.S. Some think that after an initial surge, Iran won't be able to sustain high levels of exports.
"The likely increases in Iranian exports should not be a game changer," wrote Julian Jessop of Capital Economics in a note in to clients. Even with a surge of exports, there isn't much storage capacity or demand left in the world for the excess oil, he said.
"We do not believe that Iran would want to depress prices much further by rushing to dump its inventories," Jessop said.
Kloza said the oil market is all about the short run at the moment.
"These oil prices are not sustainable in the long term, but anything goes in the next 40 days," he said.