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Iran’s return to the oil market could trigger a “positive supply shock,” sending oil prices plunging by as much as US$20 per barrel, although Saudi Arabia will probably move swiftly to ensure a softer, $10-drop in crude prices.
Increasingly crippling sanctions imposed by Western countries to punish Tehran for pursuing a nuclear program has limited Iran’s ability to export its primary production over the past few years.
But in recent weeks, both Tehran and Washington have replaced their sabre rattling with a softer tone, raising hopes of a diplomatic solution, especially as the Iranian government hopes to resolve the nuclear dispute within three to six months.
U.S. Secretary of State John Kerry was to meet Iranian foreign minister Javad Zarif on Thursday in what is billed as the first direct contact between the U.S. and Iran in six years. Foreign ministers from the U.K., China, France, Germany and Russia also were to join in the discussion.
While there have been many false dawns in Tehran’s frayed relationship with the West, Iran is motivated to end the economic siege due to its catastrophic impact on the economy, especially the all-important oil sector.
Iran is a sleeping energy giant, sitting on the fourth-largest oil reserves and the second-largest natural gas reserves in the world. Its energy infrastructure, although suffering, can still sputter out more oil quickly if sanctions ease.
“It may not take a long time for Iran to reach pre-sanction levels, as it stopped production only due to declining exports,” said Sara Vakhshouri, president of Washington-based SVB Energy International.
Iranian oil minister Bijan Namdar-Zanganeh has pledged to return production to pre-sanction levels of four million barrels per day, although it may not be a realistic target as the country has acute capital shortage and lacks access to technology, said Ms. Vakhshouri, who once worked for the National Iranian Oil Co. International.
Once OPEC’s second-largest producer and important supplier to Europe and Asian markets, Iran’s exports had fallen to 700,000 bpd in May from a high of 2.2 million bpd a few years ago — roughly equivalent to Canadian oil exports to the United States. The Middle East country is losing US$4.2-billion due to the sanctions, and the economy could contract 1.3% this year to add to a miserable 1.9% decline in 2012, according to Francisco Blanch, Bank of America Merrill Lynch’s global investment strategist.
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