NEW YORK (TheStreet) -- Iran will have to elbow its way back into a highly competitive oil market when international trade sanctions are lifted and the country resumes crude-oil production, Energy Aspects geopolitical analyst Richard Mallison said. When it does, the additional supply could deepen the global oil glut.
After years of being isolated from the international community, Iran will see trade sanctions lifted next year after reaching a deal with the U.S. and negotiating partners to prevent Iran from producing a nuclear weapon.
Speaking at a press conference, President Barack Obama said that "because of this deal, Iran will not produce the highly enriched uranium and weapons-grade plutonium that form the raw materials necessary for a nuclear bomb."
In addition to its significance as a nuclear non-proliferation agreement, the deal is likely to have an impact on the global oil supply. Iran, with the world's fourth-largest proven oil supplies, could produce 1 million barrels of oil a day by late 2017, Mallison estimated. Whether Iran reaches that level depends largely on the U.S. Congress, which has opposed the deal with Iran.
"We've straight away seen the U.S. Congress and Republican leadership make a very clear statement about their dissatisfaction with this deal -- their desire to try and block it -- and I think that will lead to some caution among some of those companies because in the end, the sanctions that affect them are controlled by Congress," Mallison said, adding that "if Congress is unwilling to lift those sanctions permanently, major investments in Iran will still look a little bit risky."
Congress is likely to continue to oppose the deal because of the impact it could have on U.S. oil producers, which Mallison said would be among the hardest hit when Iran starts pumping more oil.
Iran won't be a significant oil producer anytime soon, however, Mallison said.
"When you look at the state of Iran's upstream, it's been starved of foreign investment for a couple of decades really, and so it's going to take a long time to bring those fields back up and to increase production," he said.
When Iran reaches the 1 million barrel-a-day mark, which he estimates will take a couple of years, the oil producer will first have to compete on its own turf.
"Iran has been making some very firm statements that it expects, when it's able to increase production, other OPEC (Organization of Petroleum Exporting Countries) members like Saudi Arabia and Iraq to make way for it in the oil market -- i.e., to reduce their production in order to allow Iran to increase its exports," Mallison said. "But there's very little sign of the Saudis, the Gulf Cooperation Council States or even Iraq being willing to reduce that." In fact, the analyst said, both Saudi Arabia and Iraq have been really ramping up production in recent months.
As Iranian production increases, Mallison sees competition heating up for market share, particularly in the Asian market, where he said all the Middle Eastern OPEC producers are trying to send their oil exports.
The analyst doesn't see the oil market's significant oversupply abating despite OPEC's moves to ensure that this period of lower prices will hurt high-cost, non-OPEC production from the U.S., Canadian oil sands, deepwater projects around the world and Russia.
"OPEC members are hoping that if they can survive a period of lower prices now, those high-cost producers are going to be be forced into reducing their spending, reducing their output later in the decade, and demand growth will also be stronger," Mallison said.
If OPEC's plan works, he said, there may be enough demand around to absorb more Iranian oil, even with high levels of production from OPEC members.
But that strategy has been in place for months, and "we've yet to see the production declines really coming through. The first place we should see it is in the U.S., but even there, the data isn't conclusive yet," he said.