Oil prices slumped almost 8 per cent yesterday, taking four day losses to almost 10 per cent. In the biggest plunge since February earlier this year, oil fell to below US$53 a barrel. Several international economic factors contributed to the decline with the most significant being developments on the sanctions against Iran. Recent talks have indicated that sanctions on Iran may be lifted releasing Iran’s oil reserves on the world.
Iran currently has the fourth biggest oil reserves in the world with a 158 billion barrels awaiting to be released. As part of a nuclear deal, the West may lift sanctions against Iran allowing them to export their reserves. Over the weekend a Russian official told the media that he believes the deal is more than 90% ready. From 2011 to 2014, international oil exports have dropped from 2.5 million barrels per day to about 1million barrels per day. If sanctions are lifted, analysts expect 700,000 additional barrels of new Iranian oil to flood the market in late 2015 or 2016. This will delay any recovery in the oil prices. The deadline for the deal was extended to the 7th July and is now subject to a 60 day review by Congress.
Recent events in Greece have also weighed on international oil prices. Uncertainty surrounding the referendum lowered the Euro, resulting in a lower demand for US dollar denominated commodities. Greece’s oil use however is insignificant on a global scale and will not directly affect oil prices.
Interestingly enough, the number of active drilling rigs in the United States rose last week for the first time since December last year. However with oil prices below US$53 a barrel, time will tell if the new entrants can sustain operations.
With 60 days to review, could lifting the sanctions on Iran bring oil prices back to down $US40 per barrel? Right now it’s hard to say where the prices will go as some uncertainty remains. In the short term we will remain cautious and not increase our exposure to oil, however in the medium to long term we believe opportunities will emerge.
Author: Ben Visser
Jul 07, 2015
Ben is a Wise-owl equity analyst focusing on ASX blue-chips stocks. Ben has a Bachelor of Business in Finance majoring in property valuations and management. In his role at Wise-owl Ben conducts in-depth fundamental and technical analysis which helps him to find profitable investment opportunities on the ASX and abroad.