While the recent Iran deal has some concerned that the already flooded oil market will soon be spilling over tank tops and causing prices to trickle down with it, Forbes contributor Joel Moser has some encouraging insight into why the deal, thanks in part to the Bakken, won’t harm long-term investments.
While the obvious outcome of the deal is a drop in global oil prices due to increased supply, Moser argues that this effect is unlikely to last. He writes, “While Iran deal chatter will certainly feed volatility and likely a short term slide, ultimately, after all the guests go home, the candles burn out and the forwards expire, the fundamentals of basic global supply and demand will rebalance the market and prices will settle at around $60 to $70 a barrel.”
But, why is this the case when Iran has the fourth-largest proved reserves of crude oil and the largest proved reserves of natural gas in the world? Well, because the Organization of Petroleum Exporting Countries, whether or not Iran production is included, is no longer setting the global price of oil. OPEC’s global market share recently hit a 12-year low, and only a few months ago, Saudi Oil Minister Ali Al-Naimi said, “The production of OPEC is 30 percent of the market, 70 percent from non-OPEC … everybody is supposed to participate if we want to improve prices.”
It seems, as argued by Moser, that Bakken crude is pulling its weight when it comes to affecting the global market. In regards to oil prices, he said, “The fully loaded extraction cost in North Dakota, where fracked crude provides a meaningful enough share of global supply that prices will always return to a point which will keep that flow switched on – enough above cost to make it worthwhile, until there are more basic shifts in the energy climate.”
The announcement of the Iran deal has already increased the workload for short-term traders as expectations of increased supply caused a slight drop in prices, despite record refining throughput and decreased U.S. supplies. Much of Iran’s oil, though, has already been on the market, albeit indirectly. While the world waits for the Iran deal to be finalized, the global market oversupply continues to be the bane of investor’s and producer’s existence. Last week the International Energy Agency reported on the global market’s massive oversupply, warning that “the bottom of the market may still be ahead.”
In the IEA’s monthly report, the agency said, “It is equally clear that the market’s ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. Something has to give.” This too, though, will only be temporary. Lower prices have caused producers to scale back operations significantly, as witnessed in the Bakken earlier this year with drilling rigs dropping like flies. But, this is by no means indicative of a bust as producers have maintained production levels of 1.2 million barrels per day, despite operating the lowest number of rigs since November 2006.
Along with the slowing operations comes an increase in demand, as seen in the increasing amounts of gasoline consumption as U.S. drivers hit the roads for the summer. The slowdown, combined with the speeding drivers, add up to a rebalanced market where activity is sustainable despite low prices. Although the short-term outlook is on a downward slide, the long-term continues to show promise.