Why oil prices are falling again

Oil prices are sliding again as a result of weakening demand, high supply, and the potential for a flood of new oil if sanctions on Iran are lifted.

Shailesh Andrade/Reuters/File
A worker rides his bicycle past steel rims in a dockyard at Mumbai Port Trust in Mumbai in this November 17, 2014 file photo. Any nuclear deal between Iran and six world powers loosening sanctions against Tehran could flood an oversupplied oil market with more fuel. Officials involved in ongoing negotiations said on Sunday they were close to a deal that would bring sanctions relief in exchange for curbs to Tehran's atomic program, although no agreement was expected before July 13, 2015.

A deal to lift sanctions on Iran has not yet been made, but global oil prices are already dropping in anticipation of an upcoming supply inundation.

Iran is the fourth-largest holder of crude oil reserves in the world, estimated to hold a tenth of the world’s supply, but sanctions have long crimped the country's energy industry. If an Iran nuclear deal is finalized, those sanctions are likely to be lifted, freeing up as much as 20 million barrels of stored oil to make its way into the global market.

Oil prices dropped Monday about 1.6%, to about $52 a barrel, as investors prepare to adapt to the influx, CNNMoney reported.

Prices are about half of what they were a year ago, Reuters reported, in part because production from the oil cartel OPEC is up. Saudi Arabia, OPEC’s most powerful member, reported pumping 10.56 million barrels per day in June, a record high. The International Energy Agency said in its monthly report the oil market is “massively oversupplied.”

The rising oil supply coupled with the recent effects of Greece’s vote to reject bailout terms and China’s stock market troubles explain last week’s more dramatic price drop of as much as 8 percent, according to Reuters.

OPEC, however, said in its monthly report Monday it expects to see oil prices even out by 2016, as demand increases in China and the developing world and production grows more modestly in non-OPEC countries like the United States, where output has increased significantly in recent years due to fracking, but is expected to grow at a slower rate next year.

But with Iran back in the game, the IEA predicted, “the bottom of the market may still be ahead.” It said in its report, “Tehran has made clear its intention to lift exports as soon as the ink dries on an accord with the P5+1.”

When it does, the major oil companies will be ready. Shell chief executive Ben van Beurden told Bloomberg at a Vienna OPEC conference that everyone in the industry was just waiting for the opportunity to go back into Iran for oil.

“Iran is a wonderful country with a fantastic resource base,” Mr. van Beurden said. “As soon as there is legitimate opportunity, we will be looking at Iran.”

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Iran’s re-establishment in the oil market will come once a deal is reached with the “P5+1” countries, or the five permanent members of the United Nations Security Council – the United States, the United Kingdom, Russia, China, and France – plus Germany. In exchange for lifting sanctions on oil trade, the Western countries have demanded Iran take steps to curb its nuclear program.

Deadlines on the deal have been pushed back several times since a framework was set in April. The most recent deadline was Monday, but CNN reported that Iran’s chief nuclear negotiator Mohammad Javad Zarif confirmed that talks are set to extend into Tuesday.

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