It’s all done. Everything was finalized on Wednesday, and the oil market will never be the same.
After a landmark deal in July, a barrage of over-the-top attack ads on television, and a campaign of opposition in the media and political spheres, the Iran nuclear deal is happening.
On Wednesday, Senator Barbara Mikulski of Maryland announced that she would be voting in favor of the deal that’s rankled hardliners, war hawks, and oil investors throughout the world.
Her pledge to vote for it brings the total of senators in the “yes” column to 34 — in other words, it immunizes the deal to a veto override in Congress.
You see, if Congress passes a law rejecting or changing the nuclear agreement in any way, President Obama, as he has said several times, will veto the law. From there, Congress would try to overturn the veto.
To do that, two-thirds of Congress would need to vote to override the veto, but with Senator Mikulski agreeing to vote for the deal on Wednesday, such an override is impossible.
Aren’t politics a joy?
Soon enough, perhaps within a couple of months, the sanctions against Iran are going to be lifted, and the country will begin a massive ramp up in oil production.
Yes, in return we will see a highly scrutinized nuclear program, but with oil in a serious glut as it is, the new oil out of Iran could be devastating for investors who don’t prepare now.
Here’s what we suggest…
“American oil production could fall 1.1 million barrels a day”
Iran’s oil minister, Bijan Namdar Zanganeh, has said some conflicting things to the press since the nuclear agreement was finalized in July.
Right now, the country produces 2.8 million barrels per day, but Zanganeh has said output will rise by 500,000 barrels a day within weeks of sanctions being lifted.
From there, he claims that production will increase by 1 million barrels per day five months after sanctions are lifted, while another Iranian official has said the country will produce up to 5.7 million barrels a day at some point in the future.
Zanganeh has also said he would support an emergency OPEC meeting to prop up oil prices (but still doesn’t expect Iran to curb its output).
In fact, Zanganeh said that $70 to $80 per barrel for oil would be a fair price for everyone, if the non-OPEC producers would get involved.
However, anything that would cause a production cut in Russia or the U.S., or anything that would hurt Saudi Arabian market share, is going to crush any chance at higher prices in the short term.
So instead, we should plan for the worst for oil prices when sanctions are lifted.
I will caution that you should take Zanganeh’s warnings with a grain of salt…
I mean, the chances that Iran can ramp up production by 500,000 barrels within a week or two is slim, and another 1 million barrels in five months?
It took Bakken producers seven years to hit 1 million barrels per day, so I have some serious doubts about Zanganeh’s claims.
But according to Bloomberg and A.T. Kearney Inc. oil consultants, the more realistic numbers are different but still support a deepened global glut.
According to the firm, Iran’s oil production will grow by 800,000 barrels per day in 2016, and then the country would aim for 6% year-over-year production increases until, in 2020, the nation would hit 4.955 million barrels a day.
According to A.T. Kearney, that amount of production growth out of Iran would hit the American continents hard and would reduce output in oil producers in North and South America by 1.1 million barrels.
Such a drop would be devastating in Venezuela and Mexico and could cause some serious blowback in Canada and the U.S. as well.
That’s why, as sanctions are close to being lifted, investors should prepare for a sustained period of low prices…
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The Best Way to Take Advantage
Now, as you probably expect, the companies that will be hit the hardest when sanctions are lifted will be drillers in the Americas.
For one, drillers with too much debt and not enough profit could either be bought out or forced into bankruptcy.
Also, the financially sound drillers will suffer because the market will be too scared to touch them with all of the bad press coming for oil.
The best companies for energy investors will be the midstream players that move, refine, and store all of the oil being pumped during this glut.
If you think Iran is going to keep all of its production for its own use, you’re sorely mistaken.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
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