As oil prices test six-year lows, it’s becoming increasingly less clear just how much lower they can possibly slide.
Market attitudes towards the commodity are decisively negative as we enter the ninth straight week of oil price declines, the worst such pattern since 1986. Global oversupply, slumping demand, and financial markets rattled by a possible economic collapse in China have all contributed to a continued slide in the oil price.
Total global oil production is approximately 95.66 million barrels per day (bpd), while consumption is only 93.62 million bpd. (Source: EIA, last accessed August 25, 2015.) That’s a substantial amount of unused oil being stored away, leading to growing petroleum stockpiles which are now beginning to cause market anxiety.
The likelihood of reaching any real physical limit to storage is highly unlikely of course, but the psychological fear weighs down on oil markets all the same. Both OPEC and non-OPEC production levels are surging, as oil producers continue their game of seeing who can last longest.
Many analysts are beginning to ask what it would take to give uplift to oil prices.
While much has been made of the Iranian deal since a tentative agreement was struck in June, most people are unaware of just how much opposition it faces in Washington. Though the success of the deal seems to be portrayed as a forgone conclusion, there is a strong contingent of 54 Republican and two Democratic senators declaring opposition to the bill. (Source: CNN, last accessed August 25, 2015.) As more than 20 Democratic senators have yet to make up their mind, the result of the Iranian deal is still unknown.
There is a very real chance that President Obama might see this vote go against him. But what does this have to do with oil?
It’s simple. The agreement with Iran and expected lifting of economic sanctions has made possible the prospect of Iranian oil returning to world markets. In a market where crude oil is currently oversupplied by approximately two million barrels per day, an additional two to three million barrels would likely be enough to push prices into freefall.
But what if the entire Iran deal was cancelled?
It’s exactly what may happen, if a recent report by the Associated Press is to be believed. (Source: Reuters, last accessed August 25, 2015.) It contains a revelation that the terms of the deal allow for Iran to provide its own inspectors for the Parchin nuclear facility, which has been linked to the development of nuclear weapons. While the article was heavily criticized for sensationalism and outright errors, the larger implications of the controversy are clear.
If this small aspect of the deal was able to potentially derail the entire process, it remains entirely possible there will be more such snags. Both Saudi Arabia and Israel, Iran’s regional rivals, could produce damning evidence of some form to jeopardize prospects for lifting economic sanctions. Iran might not comply with the terms of the agreement. The likeliest situation though is that the deal could get struck down in Washington, as pressure mounts against the President.
The Iran deal still has a long way to go before it becomes reality, and even longer before Iranian oil makes its way to global markets. But the Iran deal having a significant effect on oil prices does not require actual physical deliveries of oil, only an altered public perception. Panic following the announcement of a tentative agreement and eventual prospect of Iranian oil exports in months or even years was all it took to rattle markets in June and July.
The same thing would occur if the lifting of Iranian sanctions was perceived as being threatened with cancellation.