Iran Oil Drives Ruble Downward
Iran and the world powers have come to an agreement to curtail Iran’s nuclear ambitions. As a result sanctions will eventually be lifted and Iran will start exporting oil again. Iran has the world’s fourth largest crude oil reserves and second largest natural gas reserves. As Foreign Policy notes this is good for oil companies and bad for Russia. The prospect of more oil from Iran drives the Ruble downward.
The nuclear deal struck between Iran and the West will gradually add a major new player to the global energy market. But don’t expect a radical reshuffling of the deck, at least not in the short term, though Tehran could present a big problem for major energy players down the line.
Iran’s oil infrastructure is decades behind that of other oil powers like Russia, Saudi Arabia, and the United States. But the potential resource base there — Iran is thought to have reserves larger than those of each of the three aforementioned energy giants — has firms primed to change that.
It will take time for Iran to ramp up production and update outdated infrastructure but the end result will be more oil and gas on the world market and downward pressure on the Ruble.
Bloomberg reports that the oil drop offsets positive news on a Greek bailout and drives the Ruble downward.
The ruble weakened for the first time in three days as declining prices for crude, Russia’s main export earner, offset investor optimism after Greece reached a deal with creditors.
The currency retreated 0.4 percent to 56.67 per dollar by 5:08 p.m. in Moscow, halting a 1.9 percent gain in the previous two trading sessions. Oil, which along with natural gas accounts for about 50 percent of Russia’s revenue, retreated 1.3 percent to $57.44 a barrel on speculation a deal on Iran’s nuclear program will boost its exports amid a market glut.
For Russia the strength of the Ruble is largely based on oil and gas prices and exports. The other factor for Russia is continuing sanctions for its behavior in annexing Crimea and supporting a civil war in Ukraine.
How Soon and How Much?
Prior to sanctions sixty percent of Iran’s oil output went to China, India, South Korea and Japan. It will have to win back those markets in order to sell its oil. However, China never cut back on purchases from Iran and accounts right now for forty percent of Iran output. The Wall Street Journal discusses Iran’s battle to win back Asia oil market share.
Iran may be hoping to claim back its share of Asia’s oil market now that the nuclear accord signed this week cleared the way to ramp up exports. But the competition is already getting tougher across the region.
Take India. The country has long been a key market for Iran’s National Iranian Oil Co., or NIOC. But last week, one of NIOC’s biggest customers, Essar Oil signed a 10-year crude purchase agreement with Russia’s largest oil exporter Rosneft, which will also take a 49% stake in the Indian refiner.
The deal will meet roughly half of Essar Oil’s import requirements and gives Russia a captive market for its crude exports in India for the first time. Essar didn’t respond to queries on its oil intake.
And Russia is not the only nation that has cut into Iran’s traditional customer base. Iran will need to upgrade infrastructure and reestablish its customer base before Iran oil drives the Ruble further downward.