Iran's anticipated re-entry into the global oil trade and the ongoing "shale revolution" in the United States add uncertainties to an already challenging market.

Continuing US growth in shale oil production and the prospect of Iran re-entering the global oil market with a significant increase in oil exports, will present extraordinary risk to the global oil trade, said Atul Arya, senior vice president at IHS Energy Insight. How US and Iranian oil supply will ultimately take shape over the next 18 months remains unclear, but the prospect of rising supply in a market already struggling to top $50/b will keep markets on edge .

For the United States, widely considered to be the new swing producer, the response of the US upstream business to changing market and cost conditions is pivotal in shaping oil prices. But American exploration and production (E&P) companies will have two difficult choices ahead of them: spending more on drilling and completion on the one hand; or shoring up their financial standing and adopting a more cautious stance on spending on the other, Arya noted. Which choice companies will make will have an impact on US shale production and, ultimately, oil prices and the global supply/demand balance.

In the case of Iran, the country's re-entry into oil production and global exports will add yet more supply to an already over-supplied oil market. After sanctions are lifted as Iran consents to the terms of a nuclear agreement, the market could see up to 400,000 barrels of oil a day being added over the next 18 months, exacerbating the current glut in worldwide oil supplies.

Meanwhile, Saudi Arabia can be expected to become more assertive as it counters the return to the stage of an unfriendly Iran. The Saudis-the largest producer in OPEC-might temporarily engage in a price war, increasing production and under-cutting competitors in an already low-price environment, to preempt any loss of customers in key markets and to maintain market share. The Kingdom's likely response illustrates the hard choices in store for global oil players because of the US and Iran factors-to cut investments and reduce staff, waiting out the low prices or to continue projects if their balance sheets can support them.

In times past, global oil demand growth has helped to rebalance the market as reduced prices help stimulate demand and generate higher levels of economic growth. However, in a recent webinar that covered planning assumptions for 2016-18, IHS Energy analysts said growth in oil demand can no longer be counted on to propel the industry given the wide array of economic headwinds constraining global growth. With supply abundant and demand weak, oil and gas companies should not be expecting a rapid rebound in prices as things currently stand.

For the global gas business, prospects are promising as substantial growth is projected for liquefied natural gas (LNG) after three years of flat performance. LNG trade will increase 31% from 2015 to 2018, rising from 248 million tons to 323 million tons. Residual LNG volumes, left over after demand is satisfied in Asia and Latin America, will flow to Europe and compete with pipeline supplies, including Russian gas. The United States, for its part, will become a major LNG supplier after 2018. But the challenge of gas oversupply and prices below $3.00/MMbtu in the US are squeezing gas producers there.

In mergers-and-acquisitions (M&A), total value year-to-date remains depressed as price declines have paralyzed activity. Approximately $220 billion worth of assets are on the market and there is no lack of M&A opportunities, but activity levels remain depressed as companies continue to struggle with valuing assets in an uncertain market environment..

The analysis made by IHS Energy experts on the future outlook for oil and gas was in the webinar entitled "What Should Be the Planning Assumptions for 2016-2018?" The webinar was the final installment of a long-running series called "Energy: A Turning Point-the Industry Resets," which examined in depth the current landscape and challenges facing the global oil and gas space.

In addition to Atul Arya, other IHS Energy analysts in the presentation were Roger Diwan, managing director, downstream research; Jim Burkhard, vice president, oil markets research; Pritesh Patel, director, research; Michael Stoppard, chief strategist, global gas; and Dan Pratt, senior director, research.

7 July 2015, IHS Staff Writer

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.