Oil prices likely to fall in wake of Iran accord

PUBLISHED : Tuesday, 26 November, 2013, 1:56pm
UPDATED : Tuesday, 26 November, 2013, 1:56pm

Oil prices could be headed lower after the preliminary nuclear deal between Iran and six world powers, even though it does not allow the country to export more oil.

In the short term, the deal may make it easier for Iran to sell the oil it is already allowed to sell under existing sanctions, which would increase supplies on the world market.

And the newfound co-operation between Iran and the West eases tensions that pushed oil prices higher in recent years.

But the deal, described by both sides as only a first step, raises the possibility that a more comprehensive agreement would eventually allow Iran to restore oil production to pre-sanctions levels.

That could add one million barrels per day of oil to world markets – enough to meet the entire global growth in demand for next year projected by the International Energy Agency.

“The initial reaction is going to be a more stable oil market,” said Anthony Cordesman, a Middle East and energy expert at the Centre for Strategic and International Studies in Washington.

“But everything will depend on if there’s a final agreement and how it is implemented.”

The initial reaction is going to be a more stable oil market
Anthony Cordesman, Centre for Strategic and International Studies

Iran reached an agreement on Sunday with the United States and five other world powers to freeze its nuclear programme for six months while the two sides work on a more permanent deal covering Iran’s development of nuclear technology.

In exchange, some sanctions against Iran will be relieved, and it will get access to some frozen overseas assets, including US$4.2 billion in oil revenue.

Kevin Book, an analyst at ClearView Energy Partners in Washington, predicted the price of Brent crude, an international benchmark used to price oil used by many US refineries, could fall to US$90 a barrel by the end of next year if talks yield a final agreement.

That’s 19 per cent below Brent’s level on Monday, where it closed down 5 US cents at US$111 a barrel.

Analysts caution, though, that if talks on a final deal fall apart – or even appear to be faltering – oil could instead rocket higher.

Iran and the West have been seemingly close to an agreement on nuclear issues in the past, only to abandon talks and descend deeper into acrimony.

“Even the slightest hint of an unravelling of the Geneva accord could restore a vibrant risk premium to crude,” Book said.

But oil prices appear to be headed lower for now, in part because the prospect of more Iranian oil is coming at a time when production is rising in the US, Canada, and elsewhere, helping global supply growth outpace the growth in demand.

The average price of Brent crude so far this year is 3 per cent below last year’s average, and it’s on track for its lowest average price since 2010.

Even the slightest hint of an unravelling of the Geneva accord could restore a vibrant risk premium to crude
Kevin Book, ClearView Energy Partners

Iran produces 2.7 million barrels of oil per day, 3 per cent of world demand, which averages 91 million bpd.

The country was once the world’s third-largest oil exporter, but since last year, when Western countries expanded economic sanctions against it to include oil, its exports have dropped 60 per cent to less than 1 million bpd.

Limited exports were allowed to continue to some countries, especially in Asia, that rely on Iranian crude.

Sunday’s preliminary deal does not change those sanctions, which the White House says cost Iran up to US$5 billion per month. The deal, the White House says, allows “purchases of Iranian oil to remain at their currently significantly reduced levels”.

But the Geneva deal may make it easier for Iran to sell the oil allowed under the sanctions. ClearView’s Book estimates that Iran could increase sales by about 285,000 bpd over the next month before reaching the 1 million bpd limit allowed by the sanctions.

While modest, that could help lower global prices by making up for a sharp drop in Libyan crude exports in recent months caused by civil unrest.

The simple fact that the two sides reached any agreement at all will also help reduce prices. Oil has been more expensive in recent years in part because traders worried that the heightened tensions between Iran and the West would lead to a sudden interruption of oil supplies.

Also, traders worried that the West would further tighten limits on Iran’s oil exports. While those limits won’t be loosening soon, the threat of even less Iranian oil on the world market has all but evaporated – for now.