IMF Wary of Iran’s Return to Global Markets and Effect on Oil Prices

The International Monetary Fund (IMF) has turned a critical eye to Iran’s return to the international markets following years of economic sanctions that had cut it off from much of the rest of the world. In particular, resurgence in Iranian oil exports in 2016 could have dire consequences for crude oil prices, which have already sunk in price over the last year. According to the IMF, the surge of Iranian oil supply on the market could push down prices by as much as $5 to $15 a barrel.

The International Monetary Fund (IMF) has turned a critical eye to Iran’s return to the international markets following years of economic sanctions that had cut it off from much of the rest of the world. In particular, resurgence in Iranian oil exports in 2016 could have dire consequences for crude oil prices, which have already sunk in price over the last year. According to the IMF, the surge of Iranian oil supply on the market could push down prices by as much as $5 to $15 a barrel.

Sitting atop the world’s fourth-largest oil reserve, Iran’s return to the global marketplace will undoubtedly mark a return of Iranian oil, as well. When that happens, the Middle Eastern nation expects to pump an additional 500,000 barrels of crude oil per day into global markets over the course of 2016. Iranian officials have also shown western oil companies over 70 energy projects it has in the works.

According to industry publication FuelFix, organizations like the Organization of Petroleum Exporting Countries (OPEC) and others in the energy sector may have accounted for Iran’s impact on oil supplies next year in their own production models.  However, almost every industry analyst believes that crude oil prices will probably sink further if Iran’s production levels return to levels that are more normal. 

A report issued by the IMF earlier this week echoed those fears. Similarly, the International Energy Agency (IEA) cited Iran’s addition to the world oil supply when it predicted a rise in global inventories and decline in prices in its December oil market report.

Western powers hobbled Iran’s oil exports in 2011 when they put an embargo on its oil supply to punish the nation for actions that western authorities feared might have been the prelude to experimenting with the development of a nuclear weapons program. This left the nation with an enormous stockpile of millions of barrels of oil with no place to ship it.

Thus, the mere prospect of loosening or removing restrictions on Iranian oil sent crude prices spiraling down over the summer on the news of a tentative agreement between Iran and the west. That agreement entailed lifting sanctions against Iran in exchange for controls designed to closely monitor and curtail any nuclear development programs in the Islamic state. 

According to the IMF report, “While part of this impact may be already discounted in futures markets, a further decline [in oil prices] could materialize when Iran’s exports rise.” The IMF believes that much of what happens when Iran’s oil returns to the global markets will depend on OPEC. If OPEC reduces its output to make room for Iranian supplies, prices could remain more stable.

However, OPEC signaled a contrary position earlier this month, leading many to suspect that its 13 member nations will continue to produce at their current levels and simply allow the chips to fall where they may.