Oil Drops Below $28 a Barrel as Iran’s Sanction Lifted

Oil Drops Below $28 a Barrel as Iran’s Sanction Lifted
Photo Credit: Blake.thornberry, Flicker.cm
Photo Credit: Blake.thornberry, Flicker.com

Crude prices dropped below $28 a barrel earlier this week due to the expected rise in Iranian exports after the sanction against Tehran was lifted.

The group of P5+1 decided to revoke the international sanctions that disable Iran in exporting approximately 2 million barrels per day (bpd), as part of the landmark nuclear accord reached between Iran and six world powers. Prior to the sanction, Iran exported 2.3 million bpd, which fell to one million in 2011 and 2012.

As a member of OPEC (Organization of the Petroleum Exporting Countries), Iran issued an order to increase their production by 500,000 bpd. Currently, the country has at least a dozen very large crude carrying super-tankers in-place to export to potential buyers.

However, investors fear that the lifting of the sanction could worsen the already existing oversupply of crude worldwide, especially in the United States. Since Iran’s sanction has been lifted, other OPEC members will now be able to export oil across the already weak markets, which are currently plagued by an energy supply surplus.

Even with a surplus of crude worldwide, extraction of fossil fuel is still very much ongoing in the top producing nations in the Middle East, including Iran and Iraq.

At the minute, global oil companies are planning to cut investments and projects to safeguard their future, due to declining price of crude.

“Companies want to reduce their range of activity and pick those with the highest returns on capital,” said Brendan Warn, oil and gas equity analyst.

But, construction and rehabilitation of gas pipes and gas treatment plants are still visible in West Qurna and other Middle Eastern territories. Oil and gas solution companies have been utilising local workers to help the regions provide stable maintenance support staff as well as building good relations with the country due to the high percentage of local labour employed by said oil and gas companies.

“We have established a strong network of relationships with local construction companies. These factors along with our dedication to HSE, ethics and compliance, and security have given us a successful track record of utilising local capabilities and managing the risks of working in challenging locations,” said Cyrus Ahsani, CEO of one of the top oil and gas solutions in the Middle East.

It’s not all bad though as OPEC members expect to see the price of crude regain its footing in the market this year, as they forecast the non-OPEC producers to have difficulty in sustaining production over the next six months due to the continuing low oil price.

“With market participants likely opting for the worst outcome, which would swell the global oversupply even further, lower prices are required to shut-in production from non-OPEC countries, particularly the U.S. These adjustments are likely to (contribute to) even more company defaults related to oil, as well as less investment spending across the oil sector,” said UBS analysts Giovanni Staunovo and Dominic Schnider to CNBC.


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