Russia: Tentative Iran accord sends oil prices plummeting

As the P5+1 powers and Iran edge closer and closer to a nuclear accord, global oil markets have begun speculating as to how the flow of hydrocarbons will be affected and when sanctions will be released on Iran, which holds the world’s second largest reserves of oil and is additionally among the top 10 richest reserves of natural gas. Benchmark oil prices fell roughly 8% on Monday and rebounded only slightly today, mostly on news of the Greek debt crisis and referendum (as Greek shipping companies are responsible for much of the tanker activity throughout the Mediterranean and Middle East).

Analysts anticipate that if sanctions are immediately lifted (unlikely, given most Western objections to this without extremely significant reductions in centrifuge activity and security oversight into nuclear R&D activity) it will largely restore the 2.5 million barrels per day Iran was pumping out in 2011 before sanctions were imposed. This number is over the longer term, in the short term, they expect an additional 700,000 barrels from Iran will need to be priced in to the global market.

The largest loser in this exchange, however, is Russia – who over the short term faces lower prices and perhaps an extension of the recession and over the longer term increased competition with Iran for exports to the European market. Iranian oil minister Bijan Namdar Zanganeh has stated the priority markets for Iranian exports are Asia and Europe. Despite these dire predictions for Russia, Iran’s main source of concern is the sanctions relief schedule. Iran also requires far more investment in its oil and gas sector in order to increase recoverable reserves and conservative estimates put the incipient deals for Western investment in the energy sector alone at $100 billion.

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News Briefs:

  • Mongolia is planning on selling off its stakes in 10 of its government-run enterprises over the next year to reverse its faltering economy. The small stakes are mostly in power plants for Ulaanbaatar, but the largest one is the stake in the Tavan Tolgoi coal mine deposit, which, according to the CEO of the government run entity controlling the mine (Erdenes Mongol LLC), will sell off 20-30% of its ownership stake. The nascent Mongolian stock exchange surged some 66% in June on news of the deals on the Oyu Tolgoi copper mine and Tavan Tolgoi deals.
  • Indian Prime Minister Narendra Modi began his Central Asian tour yesterday and his primary focus is clear: energy. India is also vying to join the Uzbekistan-Turkmenistan-Oman-Iran transit treaty to allow India even more access to Turkmenistan’s rich reserves of natural gas. Turkmen gas from the region could be routed from Chabahar to Kandla port in Gujarat, circumventing the much delayed TAPI project that has been prone to major discussions about risk.
  • In Istanbul, hundreds of Turkish citizens are marching to protest the treatment of the Muslim Uighur minority in China. The group was mostly peaceful, but reportedly attempted to attack a group of Korean tourists that were mistaken for Chinese nationals. Relations between the Uighur group and Turkey consists of mostly an old cultural, religious, and linguistic heritage and ties between China and Turkey have been strained since China recently banned its Muslim officials from fasting during the month of Ramadan.
  • Credit rating agency Fitch has maintained Russia’s BBB- rating, on the verge of the stigmatized “junk” status, after downgrading Russia in February. It reissued its negative outlook, however, citing a deep recession that will likely force the economy to contract some 3.5% this year. Fitch’s press release cites “ever-present oil price risks and worsening geopolitical tensions” citing the breakdown of the Minsk II Accords. However, Fitch also noted Russia’s strong sovereign balance sheet and low sovereign financing needs, but exposure to market weaknesses like oil price fluctuations and “weak governance” were of primary concern.
  • RFE/RL has an exclusive interview with former Kyrgyz President Roz Otunbaeva. She was President for the short period from April 2010 until December 2011 immediately following the April Revolution which led to the ousting of former President Kurmanbek Bakiyev. She is currently the head of the parliamentary caucus of the Social Democratic party, one of several Parliamentary factions within the Kyrgyz government today.
  • FT’s BeyondBrics has an interesting piece on the Southern Gas Corridor that will feature gas supplies from Iran, Azerbaijan, Turkmenistan, and Kurdistan and pass through Turkey to supply Eastern Europe. The largest volume increase is expected from Azerbaijan, and Turkmenistan is attempting to join the corridor by building the Trans Caspian pipeline with support from the EU.
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