Iran economic sanctions and oil market
Iran ready to pump 500,000 additional oil barrels a day in the already oversupplied oil marketHandout via Reuters

Oil prices were again under the cosh on Tuesday (19 January), as they relinquished earlier gains to drift below the $29 (£20.4, €26.6) a barrel threshold by mid-afternoon in London, with worries over the ongoing global oversupply exacerbated by Iran's return to action.

On 16 January, the United Nations lifted its sanctions on the country after it deemed Tehran had met its commitments to curtail its nuclear programme, meaning Iran now has new buyers for its oil output, expected to increase by 500,000 barrels a day (bpd).

With oil prices already at record lows amid weakening demand from Asia and global oversupply, the prospect of Tehran re-entering the market sent shivers down investors' spines, particularly as OPEC has so far failed to address the issue of oil glut.

"Now that Iran has been given the green light to come in from the cold, it is difficult to see where the next rebound in oil prices is likely to come from, raising concerns about further bankruptcy losses across the sector, if as predicted prices fall further towards $20 a barrel," CMC Markets' analyst Michael Hewson said last week.

Since the turn of the year, crude prices have fallen by a quarter, taking their slump over the last 18 months to 75%. Analysts sound pessimistic over the short-term outlook, despite the brief rally oil benchmarks enjoyed at the beginning of this week.

"Any upside for Brent is tempered by the knowledge that Iranian oil will be exported to Europe but not to the US leading WTI to trade at a premium," said Mic Mills, head of client services at Capital Index.

During the past three years, Iran's crude production has been relatively flat, averaging 2.8m barrels per day in 2015, which accounted for 9% of OPEC's total oil production. However, according to the US Energy Information Administration, the country's annual average crude oil production is forecast to grow to 3.1m bpd in 2016, which would represent 10% of projected total OPEC production, and to close to 3.6m bpd in the following 12 months.

Away from the oil market, Iran's return onto the global economic stage after a decade-long hiatus is expected to have momentous consequences and not only for the neighbouring countries, whose markets tumbled following news sanctions over Tehran had been lifted.

With a market capitalisation of over $90bn, Tehran is the Middle East's fifth-largest stock exchange and it is now expected to become a direct competitor for its Saudi Arabian counterpart, which opened the doors to foreign investors seven months ago.

While investing in Iran was already legally allowed for a host of international investors, the sanctions in place hampered the country's banking system to a degree where it was virtually impossible to transfer money in and out of Iran. With the sanctions lifted, Iranian banks will now reconnect to the Swift banking system, which processes international financial transactions.

Following the implementation of the agreement over Iran's nuclear deal - otherwise known as the Joint Comprehensive Plan of Action (JCPOA) - foreign investors will be also allowed to invest in energy companies, an area which had been off limits so far. Tehran said it hopes to attract approximately $30bn worth of foreign investment to help realise its ambitions to increase oil production.

"The implementation of JCPOA marks a historic moment in Iran's re-engagement with international markets and is also an important step towards recovering diplomatic ties," said Sarosh Zaiwalla, founder and senior partner at international sanctions law firm Zaiwalla & Co.

However, while sanctions on Iran have been lifted, the majority of US sanctions preventing US citizens from conducting transactions in Iran remain in place. The majority of dollar-denominated transactions don't settle through the US system, which prevents large deals from being finalised.