Markets
XOP

This Nuclear Arms Race Could Further Threaten the U.S. Oil Industry

Brent Crude Oil Spot Price Chart
Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts .

That's happened without more than 1 million daily barrels of Iranian oil, which could be coming back online very soon.

American oil hits fresh lows even as Iran prepares to turn the pumps back on

On March 19, West Texas Intermediate, a common benchmark for U.S.-produced oil prices, almost fell below $43/bbl, and has been trading near or below its low since the 2009 recession for much of the past week. This has been driven by concerns that U.S. production has continued to grow even as the oil market remains oversupplied.

Iran's nuclear program has been around for 35 years. The U.S. was instrumental in its early days, and even American utilities used it to market nuclear power as safe.

At the same time, the negotiations with Iran could lead to the country pouring hundreds of thousands of new barrels of supply into an already oversupplied market, as soon as this summer. The country is starving for cash, and even with Brent crude -- the international benchmark -- trading below $55 per barrel, Iran could pour as much as 1 million barrels per day in new supply into the market "within a few months," according to Iranian Oil Minister Bijan Zanganeh.

At the same time, American oil producers have reduced spending on development of new wells by tens of billions of dollars since late 2014. This has resulted in significant cuts in drilling activity so far this year. Through March 16, there were almost 600 fewer drilling rigs operating in oil fields in the U.S., more than a 40% reduction from year-ago levels.

However, the drilling cuts are yet to materially affect oil production, which is actually up so far in 2015. This is why, after a slight rebound in oil prices in late January and early February, prices have been steadily falling, on concerns about the continual oversupply in the global and domestic oil market.

Impact on U.S. oil producers

While it's been slow to materialize, American oil output is expected to begin flattening in the next few months. Though it's unclear if production will actually decrease, at this point, flat U.S. production would likely reestablish some balance in the market, and lead to a recovery in oil prices. The Iran situation could significantly change the game, though.

The way things are unfolding, Iran would begin ramping up its production just as U.S. output stabilizes, meaning the current global oversupply continues. This would very likely keep oil prices down for an impossible-to-determine period of time.

The impact of oversupply -- without all that extra Iranian oil -- is already being felt on U.S. producers' stocks:

XOP data by YCharts .

The Dow Jones U.S. Select Oil Exploration and Production Index has declined 27% since oil prices peaked in June; but it's important to note that this index isn't really a good measure of U.S. producers. As a starting point, it's market-cap weighted, which means that ConocoPhillips , a U.S.-based international producer, makes up 13% of the index, while several refiners -- which can actually benefit from falling oil prices -- make up another 18% of the index. The SPDR S&P Oil & Gas Explore & Prod. (ETF) , on the other hand, is almost exclusively made up of independent U.S. producers, which are bearing the full brunt of falling oil prices.

While the majority of U.S. producers have enough capital to ride out the current environment, Iran's million-barrel addition to the market could change the dynamic quickly for producers with limited resources. Even the best-managed and capitalized producers would likely be forced to make further cuts to drilling, and potentially, even some marginal production if prices stay low for an extended period of time.

While low oil prices are good for consumers, because oil is used for everything from a feedstock for manufacturing to the primary fuel for shipping, cheap oil means lower prices. However, there has already been some impact on domestic jobs in the industry, while many states that depend on taxes from oil producers will also feel a pinch. The double whammy here is more people potentially depending on government assistance, while the resources that help fund those services falls.

Looking ahead: Realities, unknowables, and operating based on likelihoods

Many in the industry doubt just how much sustained production Iran could generate at this point, because the country quite frankly hasn't had the money to invest in maintaining its oilfields with the current sanctions in place. Many in the industry doubt that it could sustainably produce 800,000 bbl/d at this point, and that it could take a year or more for the necessary investments to get the country to even that point on a sustained basis.

However, there's little reason to doubt that the international community and Iran are likely, at this point, to reach an agreement that allows the country to turn the oil pumps back on, increase exports substantially, and reclaim its former place as the No. 2 OPEC producer behind its rival Saudi Arabia. While only time will tell how quickly -- and how much -- Iran can scale up its oil production, it's not likely going to be a good thing for U.S oil producers.

That, in turn, is likely to be harmful for investors looking for a rebound in oil producer stocks, and further the damage to those already investing in the industry.

How to invest in the technology fueling the U.S. energy boom

As the price of oil plummets, savvy investors are looking for a way to invest in this new energy dynamic. And there's one high-caliber company in the oil-services sector using advanced technology to profit from the U.S. oil boom. Given the country's ongoing quest to extract more and more oil, I strongly urge you to claim your copy of our brand-new investigative report on this company helping fuel its boom. Simply click here for access .

Oil pumpjack near Midland, Texas.

The article This Nuclear Arms Race Could Further Threaten the U.S. Oil Industry originally appeared on Fool.com.

Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

XOP

Other Topics

Stocks

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More