Another Hurdle for Iran’s Crude Comeback

With Western sanctions set to be lifted as a result of the nuclear deal, Iran is hoping to unleash large quantities of new supplies on the global market, intending to nearly double its current output by the end of the decade. And in the short-term, Iran is on the record as saying it plans to boost production by one million barrels per day just months after the sanctions are lifted. But that’s raised many analysts’ eyebrow; Iran certainly has the reserves and the spare capacity to ramp up production, but the quantities that they hope to bring online entail a number of logistical challenges, especially in the short time frame Tehran has outlined.

One example of those challenges? Reuters reports on the difficulties of fully utilizing a larger oil tanker fleet:

Iran’s main tanker operator NITC remains blacklisted by the United States and European Union since 2012, meaning it’s unable to secure foreign insurance or international classification services, which certify ships have met safety and environmental standards necessary to get access to most ports. […]

“It is fair to say that commercially they will probably be more difficult to fix than a ship of … an independent owner or certainly a non-Iranian owner,” said Hugo de Stoop, chief financial officer with leading Belgium-based tanker owner Euronav. “It will take some time.”

Historically, however, petrostates have proven remarkably resilient in these sorts of situations, and with oil sales forming the backbone of Iran’s economy and its national budget, there’s no shortage of incentive to get its fleet online as quickly as possible. If and when that happens, the global market will be flooded with more oil at a time when supply already heavily outweighs demand. While some of that is already built in to today’s oil price, we can reasonably expect prices to dip if Iran can overcome these challenges and follow through on ramping up production.

And, if all of that comes about, it’s Russia who stands to lose the most, as its share of the valuable European market will be threatened by Iran, which produces a similar grade of crude.