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Falling oil price to force Iran to halt infrastructure projects

Oil&Gas Materials 17 October 2014 11:45 (UTC +04:00)
International crude prices have sharply dropped in recent weeks to below $90 per barrel. In East Asia, the oil price went even further - below $87
Falling oil price to force Iran to halt infrastructure projects

Baku, Azerbaijan, Oct. 17

By Umid Niayesh - Trend:

International crude prices have sharply dropped in recent weeks to below $90 per barrel. In East Asia, the oil price went even further - below $87.

Iran sells crude oil at $86 per barrel, Mehr News Agency reported on Oct.17.

Mehrdad Emadi, an economic advisor in EU believes that the reduction in the oil price will greatly affect the implementation of development and infrastructure projects, such as road, port, airport, and building construction in Iran.

In an interview with Trend on Oct. 15, Emadi underlined that the main concern is that the oil price may decline to $83/b.

"If this happens, many of infrastructure projects in the country will be halted," he added.

While commenting on possible solutions the expert said that Iran has a number of options to deal with the problem of falling oil prices, but there's no definite solution. He said that boosting exports of non-oil goods which have not been banned by the international sanctions is one of the options.

Another option, according to Emadi, is to sign barter trade deals with other countries, similar to the one which has been recently signed with Russia.

No OPEC-state will be harmed by oil price cut

Meanwhile, some experts believe that the reduced oil price will not affect the OPEC member countries. Anatolii Baronin, director at Da Vinci AG Analytic Group said that decreasing of oil prices will go alongside with increasing the amount of production, so no OPEC-state will be harmed by this process.

With regard to Saudi Arabia lowering the oil price, Baronin said that the country's position shows that the world community is ready to battle with Russia on oil market.

"I think that the position of Saudi Arabia means that world community is ready to battle with Russia on the oil market," he said.

The expert made the remarks while commenting on recent reports about Saudi officials' stance to the oil prices below $90 per barrel.

Reuters reported that the Saudi Arabian officials have recently conveyed a message in private meetings with oil market investors and analysts that the OPEC's largest producer is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two.

"First of all, if prices will go down in conditions of sanctions, Kremlin won't be able to develop the Arctic fields. The pressure on the Russian budget will increase as well," Baronin explained.

The Saudi Arabia and the Western world will provide prices on the level that is safe for their economies, he said.

"But we should understand that oil price-proof budget for Saudi Arabia is not equal to the one of Russia that is currently under sanctions," Baronin said.

"When the majority of oil producing countries will be open for foreign investments, Russia will not be, so the investments will flow to Africa and the Middle East, for the development of oil fields," he said.

Baronin also does not agree with theories which claim declining of oil prices is a campaign against shale oil projects.

"I saw the idea that goes mainly from Russia but the fact is that the share of shale oil is too small," he said.

"Today there's a chance to diversify the oil market and to decrease Russia's share in it," Baronin said. "It's important, because energy issues become more and more politically directed by Moscow and the EU is under their pressure."

He added that decreasing of oil prices will help Europe to buy oil and increase amount of purchase outside Russia. Baronin also said that the other oil producers are safe and will see new possibilities come to them.

With regards to Iran, Baronin said that Iran does have a chance to receive new, more comfortable conditions on the world market.

Oil prices could fall to $80-85 /b in 2015

Baronin forecasts that the oil prices could fall to $80-85 /b in 2015.

Oil prices plunged nearly $3 a barrel on Oct. 14, on track for the biggest one-day slide in over a year after the the International Energy Agency (IEA), cut its estimates for oil demand this year and next, Reuters reported.

Brent crude for November fell $2.65 a barrel to $86.24 after briefly dipping below $86 a barrel, its lowest since December 2010.

The U.S. crude also fell $2.68 a barrel to $83.06 after it pared sharp intraday losses on Oct. 13 to settle down 8 cents.

The OPEC Reference Basket (ORB) stood at 85.93 dollars a barrel on Oct. 13, $10.05 under the September average. The ORB declined for the third consecutive month and dropped almost $12 or 11 percent of its value since June to an average of $95.98/b in September.

Commenting on the prospective of the falling oil prices a US Analyst told Trend Oct. 15 that oil supply on an aggregate level is determined by the costs of finding and exploiting new resources.

"As these costs rise, higher prices are needed to justify further upstream investment," said the expert, who asked to remain anonymous.

"This process is self-correcting and cyclical over the longer run in that if the prices fall below the level to needed to incentivize new investment, the market will eventually tighten, and prices will rise to the point that encourages more upstream investment," the analyst added.

The expert went on to note that on a global scale, most companies have large sunken cost and will continue to develop oil projects, saying "oil companies are accustomed to price fluctuations and use pessimistic price outlooks in the majority of cases."

"In the case that prices would be driven below the breakeven points for unconventional barrels, we foresee the market quickly tightening and reversing the downward pricing trend," the expert noted, adding that even if the price is driven down for a month or two, market forces would trigger a price increase.


Temkin Jafarov, Fatih Karimov contributed to this article

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