4 reasons the Iran accord isn’t crushing oil prices
The nuclear deal with Iran isn’t quite the apocalypse oil investors might have feared.
Oil prices Tuesday CLQ5, +0.70% LCOQ5, +0.65% took a brief dive after news that Iran reached a historic agreement Tuesday with the U.S. and five other world powers. Prices, however, finished higher, with oil on the New York Mercantile Exchange above $53 a barrel, its highest settlement since July 2.
The pact aims to prevent Iran from producing nuclear weapons in exchange for lifting sanctions, including those limiting Iranian oil exports. The market is bracing for millions of barrels of oil in an already flooded world market. But the Iranian output, when it finally comes on line, may not be such a drag on prices.
To be sure, Iran is a big contender in the oil world. It has almost 10% of the world’s crude-oil reserves and as a member of the Organization of the Petroleum Exporting Countries, holds 13% of the cartel’s reserves, according to the U.S. Energy Information Administration.
“There is no new oil on the market yet, and while the outlook could weigh on the global [oil] market, there are still many questions to answer,” said Phil Flynn, senior market analyst at Price Futures Group.
The agreement has been anticipated
A deal has been anticipated. The oil markets have fretted over the potential size of additional oil supplies from Iran since a tentative deal was reached back in April.
It will take months for Iran to ramp up
Secondly, it’ll take months or more for Iran to ramp up its production to former levels and it won’t be able to flood the oil market all at once.
Richard Nephew, program director at the Center on Global Energy Policy at Columbia University, pointed out in a commentary piece that it will “easily” take six months before sanctions relief is evident.
Iran can certainly put its stored oil, estimated at around 30 to 40 million barrels, on the market, but “Iran would take a price hit if it wishes to move it fast,” said Nephew.
He referred to expectations that Iran will be able to put upward of one million barrels a day of extra oil on the market in a matter of months as “optimistic.” Iran produced about 2.8 million barrels of crude oil a day in 2014, down from nearly 3.7 million in 2011 because of sanctions, according to the EIA.
“After that, Iran will have to ensure that its new production increases,” Nephew said.
Analysts have said Iran’s oil infrastructure is in dire need of repairs and Thomas Pugh, commodities economist at Capital Economics, said the nation’s aging oil fields require a significant amount of time and money to bring back into full production.
There is still the matter of getting the nuclear agreement to pass muster in Congress.
In the U.S., it will take at least 30 to 60 days for the pact to get support, with Congress needing to receive the text of the deal, hold hearings on it and decide what to do, said Nephew, who’s a former lead sanctions expert for the U.S. team negotiating with Iran.
Lastly, Iran must contend with OPEC heavyweights like swing producer Saudi Arabia, which lifted its production level to 10.35 million barrels a day in June, according to a Platts survey.
“We know that OPEC’s main reason for flooding the market was to try to defend market share from the upstart U.S. shale producer,” said Flynn. “But the potential return of Iranian oil may actually turn OPEC’s production war away from the U.S. and focus on Iran.”