Wednesday, July 15, 2015

Ripple effects: What the Iran nuclear deal means for oil

By Rob Nikolewski │

International oil markets got a bit jittery on news of a nuclear agreement with Iran, but most energy analysts think in the short term Tuesday’s announcement shouldn’t signal a dramatic change in price, supply or demand.

But in the long run, that figures to change as the deal may have major geopolitical ramifications in the Middle East while also placing financial pressure on U.S. producers.

“There isn’t going to be a surge in Iranian exports, at least not for several months to come because the detail in the agreement, once you drill down into it, Iran still has to demonstrate certain behaviors over the next few months,” said Neil Atkinson, head of analysis at the London-based Lloyd’s List Intelligence, which monitors worldwide shipping and trade.

According to the details of the agreement, by Oct. 15 Iran must show that it has met its commitments and inspectors with the International Atomic Energy Agency hope to issue a final report by Dec. 15.

“It’s almost like getting a certificate of verification from the U.N. in December,” Atkinson said on CNBC. “At that point, it may well have become possible for them to export more oil, but I think the more sober analysis we’ve looked at in recent times suggests that Iran will export more oil, but it’s not going to be a tidal wave.”

A longtime member of the Organization of Petroleum Exporting Countries, Iran owns the world’s fourth-highest amount of crude proved oil reserves, but the regime has been badly hurt by economic sanctions imposed by the United States and European countries in 2012.

Those sanctions can be lifted in light of Tuesday’s announcement, provided it adheres to the agreement’s provisions.

Of course, that brings up a sticky question: Will Iran abide by the agreement?

“I don’t have a high degree of trust in the Iranians,” Ted Kassinger, a former State Department attorney and deputy secretary at the U.S. Department of Commerce in 2004 and 2005, told “But on the other hand, the deal is somewhat more detailed than I expected.”

Provided it follows the rules, Iran can start putting stockpiles of oil on the international market. Estimates vary when it comes to guessing how much Iranian oil is in storage, ranging from 20 million to 40 million barrels.

That’s a lot but the numbers are relative, considering the world consumes about 94 million barrels a day.

Within moments of the deal’s agreement, the oil market got nervous.

The price of Brent crude — the widely-recognized international price — dropped 2 percent.

But analysts said traders realized the market anticipated an agreement would be reached and Brent bounced back, with futures prices for August rising 66 cents.

Traders in West Texas Intermediate crude — the benchmark for U.S. producers — shrugged off the news of the deal as the price per barrel went up to almost $53.

Looking long-term, the trade agreement with Iran will increase the amount of oil sloshing around the globe.

Energy analysts at Platts estimate that within a few months Iran will be able to put a half-million barrels a day on the market — then add another 500,000 barrels a day after that.

More oil on the market will put downward pressure on prices, which took a dive after OPEC — and the cartel’s dominant member, Saudi Arabia — decided in November to resist curtailing production.

North American producers hurting since the OPEC decision may find themselves under more price pressure when the full effect of the lifted sanctions on Iran are felt.

“Assuming Iran throws another 500,000 to a million barrels on the market, there’s going to be an offset in terms of declining North American production,” said Bernard “Bud” Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University. “Our shale producers are clearly in a period of entrenchment and consolidation.”

But at the same time, costs have come down as U.S. producers, reacting to the OPEC move, have developed more efficient extraction methods.

“The next couple years it’s going to be pretty problematic, but once world oil prices recover and get back to the $70-$80 (a barrel) range, then shale will come back big time,” Weinstein said.

The nuclear agreement’s biggest impact may be geopolitical, leading to more tension in the Middle East among Persian Gulf countries — in particular Saudi Arabia, the country that dominates OPEC and has clashed with Iran for influence in the region.

Iran’s population is primarily Shiite Muslim while Saudi Arabia is majority Sunni.

Related: Could a nuclear deal with Iran threaten the U.S. oil boom?

The Saudi government didn’t comment on the deal, but a news anchor on its state-run television network did.

“Iran made chaos in the Arab world and will extend further after the agreement, and the GCC (Gulf Cooperation Council) countries should reduce their confidence in America and turn their focus to Russia and China,” said Mohammed al-Mohya, on Saudi Channel 1, according to Reuters.

Armed conflict in the region could interrupt oil supplies, which would lead to price spikes across the world.

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