Oil Prices to Get Hit By Iran Nuclear Deal: Societe Generale

By Nick Cunningham, Oilprice.com:

The fate of global oil prices will be determined in Lausanne, Switzerland this week.

An unlikely location for oil markets, to be sure, but that is where U.S. Secretary of State John Kerry is meeting with Iran’s Mohammad Javad Zarif for intense negotiations over Iran’s nuclear program. The P5+1 countries and Iran hope to come to an 11th hour agreement that could pave the way for a historic thaw in relations. The deadline for a deal is March 31 – Tuesday night.

Although nuclear weapons proliferation is the headline item, one of the most significant side effects of the negotiations will be their effect on the price of oil. Iran, as a member of OPEC and a major oil producer on the world stage, still has substantial influence on oil markets.

Oil producers are still producing more oil than the world can handle, with around 1.5 million barrels per day in excess capacity. That glut could grow much bigger if the U.S. and Iran resolve their differences.

Iran hopes to bring an additional 1 million barrels per day back online in the coming months if a deal can be signed, a volume that would crush oil prices. The prospect of permanently lowering tensions with Iran – especially in light of the Saudi attack on rebels in Yemen – would also push down prices substantially. If the West and Iran can reach a deal on Tuesday night, oil prices could lose an immediate $5 per barrel, according to analysts at Societe General.

It is unclear how quickly Iran could resuscitate its decrepit oil industry even if sanctions are removed. Iran has large oil reserves, but the severing of its relationship with international financial markets has scared away investment, and its major oil fields are in need of maintenance and rehabilitation. But it appears that the need to remove sanctions and boost oil output has contributed to Iran’s willingness to consider a deal. Iranian President Hassan Rouhani has sought to woo international oil companies to move back into Iran as they may be the key to increasing oil production.

Still, that is all a matter for another day. The immediate effect of a deal, regardless of Iran’s long-term ability to boost output, is hard to overstate. The mere act of coming together to sign a deal would be an enormous blow to U.S. shale companies. A $5 drop in oil prices and the expectation of forthcoming Iranian crude would keep oil prices depressed much longer than analysts had predicted. Speculators would rush out of oil and the bear market would continue throughout the rest of this year, putting more financial pressure on weak U.S. drillers. More write-downs and bankruptcies could be expected.

In contrast, the failure to reach a deal could have the opposite effect. Without an agreement, there is not a clear path forward for a peaceful resolution to the standoff between Iran and the West. While Secretary Kerry and Foreign Minister Zarif sit in Switzerland, tensions are rising between the U.S. and Iran on the Arabian Peninsula. The Saudi attack on Yemen alone should not have much of an effect on oil markets (Yemen is only a marginal producer of oil), but the collapse of negotiations coupled with rising conflict between the U.S. and Iran in Yemen would stoke the possibility of a future war. In unfortunate timing, Iran claimed that the U.S. killed two Iranian advisors in Iraq in a March 23 drone strike. The U.S. denies having launched any strikes near the alleged site on that date.

The oil markets could greet the impasse with a geopolitical “premium,” potentially adding a few dollars to the price of a barrel of oil this week should the talks falter and relations deteriorate.

There are still significant differences outstanding, including the timeline for the removal of sanctions. Iran wants them removed much quicker than the U.S. can stomach. Also, Iran wants fewer and shorter restrictions on the use of advanced centrifuges.

There are some signs that a deal may be moving out of reach. On March 29 Iran’s Deputy Foreign Minister poured cold water on a key provision that would see uranium shipped out of Iran. American officials played down Iran’s apparent backtracking on Monday, arguing the final details have yet to be hammered out. But Russian Foreign Minister Sergey Lavrov left Switzerland for Russia, with a spokesperson saying that he will only return if a deal moves closer to final agreement. That doesn’t suggest that things are going well in Switzerland.

Many hope both sides can overcome their differences as well as hardliners in their respective countries. Whatever the outcome is, it will determine the direction of oil prices over the coming months. A deal raises the prospect of a flood of oil rushing onto an over-supplied market, which will send oil prices into a tailspin. Failure to find common ground could raise tensions between Iran and the West – and also raise the price of oil. By Nick Cunningham, Oilprice.com

No additional headaches needed: oil is already giving Wall Street and the American oil patch enough headaches. Read…  Wall Street Banks Hit by Oil & Gas Defaults, Bankruptcies

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  7 comments for “Oil Prices to Get Hit By Iran Nuclear Deal: Societe Generale

  1. Julian the Apostate says:

    Let me get this straight. The Mullahs can’t fix their broken toys, so they’re going to make nice, tie up their Jihadi pit bulls for a while ( while getting their way on nukes ) wait til their play-pretties are all fixed and pumping out oil again, shout Death to America, steal back the oil company’s investment? This by SecState Kerry is a good thing, yes?

  2. Petunia says:

    If the Russians, who are next door to Iran, are not concerned about their nuclear capabilities why are we so concerned. This is just more Kabuki theater for the masses to justify giving more money and weapons to Israel.

  3. Julian the Apostate says:

    MAD worked back in the day because nobody sane, including Stalin, believed that anyone could win a nuclear war. Iran would cook off a nuke in a heartbeat if they had one, and Tel Aviv would be the first target. And given this administration’s lack of sense in matters of foreign policy, they want to give children who live in a powder keg matches to play with.
    I’ve never bought into Iran’s ‘need’ for nuclear power – they’re sitting on a lake of fuel. But the consequences of such a nuclear confrontation would make Fukashima, Chernobyl, and 3 Mile Island look like pattycake. If the Russians aren’t worried-they should be.

  4. John Yard says:

    A normalization with Iran will clearly put downward pressure on the oil market. I wonder how much of the antagonism of the oil-rich Gulf states toward Iran is based on fear of Iran rejoining the world market. This will be good news for the world economy, bad news for oil producers.

  5. chistletoe says:

    it strikes me as yet another situation calling for buying on the rumor but selling on the news …..

  6. Gil Obrero says:

    I cannot understand how anyone who is sane can possibly believe that any deal is going to be done..
    It was a charade from beginning to end and only the most cursory glance at what has gone before over TEN YEARS will soon put your mind at rest about any possibility whatsoever.
    It is not going to happen never was going to happen and no one is going to invest in oil in Iran as the price keeps heading south.
    Which brings us back to the price of oil.
    Anyone who takes notice of global demand, not just for oil but particularly iron ore and copper should also realize that as corporate profits head south in a spectacular way now that free cash for leveraged share buybacks and dividend boosting and all other manner of fraudulent profit inflation is not limitless, and an end is nigh, or otherwise the frackers would still be flogging toxic bonds, means that oil is still maybe 50% more to fall.

  7. Julian the Apostate says:

    In a sane world I would agree with you Gil. Not that I think there would be a deal in the classic sense – Obama would simply give away the store. Risk aversion is non-existent, and cash strapped oil services would flock to Iranian money as a drowning man to a life preserver. Most would stay away, but enough would rush in. Grasping at straws is not a plan, just desperation. It will collapse, just as you say.

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