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Is oil facing a final washout?

The news over the weekend that the sanctions against Iran have been lifted took very few people by surprise, but the confirmation that the country is back among the global oil-producing fold does bode ill for prices.

As the International Energy Agency pointed out in its latest oil market report released on Tuesday, “now that the suspense is over, attention switches to the impact on oil market balances and the likelihood of further declines in oil prices following a torrid start to 2016.”

And, while the agency says many analysts believe the easing of sanctions to already be in the price, it does point out that there remain “considerable uncertainties” around the quality and quantity of oil that Iran can bring to the market in the short term.

The country’s intention is to lift exports by 500,000 barrels immediately and then increase shipments by a further 500,000 over the next year, however, as ETF Securities commodity strategist, Nitesh Shah, points out, despite these ambitions “the country’s dilapidated infrastructure is unlikely to support the export of more than 300,000 extra barrels of oil.

“Iran does not have enough fields in operation. Bringing online fields that have been delayed since 2014 would at most allow for 400,000 additional barrels,” he said.

And, if it is to expand production more significantly it would require the assistance of international oil firms to build out the infrastructure, Shah adds, and, in the current environment the appetite on the part of these firms to get involved “is likely to fall short of expectations”.

Shah said, given the current low prices, there is also little room for Iran to manoeuvre on price, however, the IEA said: “if Iran can move quickly to offer its oil under attractive terms, there may be more “pricing in” to come.

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