Iran deal shakes up outlook for oil

Does a deal with Iran spell a long-term downtrend in the price of oil?

The initial response by markets to last weekend's breakthrough in negotiations between Iran and the West was relatively modest, with oil prices easing around 1% on Monday, says Christopher Helman on Forbes.com.

In practice, that looks a sensible reaction, given that what was announced was purely an interim deal of limited scope. "No one is expecting any flood of Iranian crude back to the market [and] the White House insists that sanctions on Iran's oil and banking sectors remain in place." But if these first steps lead to a long-term solution, the effects will quickly be seen.

How much risk is in the price?

"About that much could quickly melt off of benchmark prices in the days and weeks to come, bring crude oil down from about $100 a barrel in the US into the $80 range."

But reduced risk would only be part of the picture, with the potential boost to supply proving equally important. "The accord should unlock 800,000 barrels a day of global supply by next year [compared to global demand of] 89 million, rising over time as foreign firms return and the country's ruined oil industry comes back to life," says Ambrose Evans-Pritchard in The Daily Telegraph.

That would help to "unleash a flood of oil onto world markets by next year just as crude output picks up in Libya, Iraq, and North America, triggering a slide in prices and a major shake-up of the energy landscape". The increased contribution from the Iran deal alone could take $13 per barrel off prices, he says, citing estimates by Citigroup.

In the medium term, the end of sanctions and increased foreign investment in Iranian oil fields could lift global supply by at least a further one million barrels per day, says Tom Pugh at Capital Economics; the fact that the country's output today is just half of the six million barrels per day it was producing at the time of the 1979 revolution gives some indication of how much ground it might be able to make up.

Factor this into a picture of steadily increasingly supplies from other sources, plus greater energy efficiency, and it seems likely that oil prices could fall to around $70 by the end of the decade.

Will the deal go through?

This is likely to be challenging, say analysts at Barclays; many US lawmakers are already expressing concerns that the Obama administration is being too conciliatory and may try to scuttle the agreement.

The reaction of Israel and Saudi Arabia who have already made plain their displeasure at any concessions being made to their principal enemy won't help.

Nonetheless, a successful outcome is more likely than not, although it will be a close call, says political risk consultancy Eurasia Group. The "dire state of Iran's economy" means that Iranian leaders have every reason to try to secure a deal, while the Obama administration has one "very strong, even trump argument" at its disposal.

"If this deal fails, the only way to prevent Iran from becoming nuclear-weapons capable is a war. That line will resonate with Congress." Overall, the outlook for oil has just become significantly more bearish.

Recommended

The crisis brewing in emerging markets
Emerging markets

The crisis brewing in emerging markets

Covid-related political unrest and financial collapse in the developing world are the biggest threats right now, says Matthew Lynn.
25 Jul 2021
The charts that matter: what happened to reflation?
Economy

The charts that matter: what happened to reflation?

Government bond yields turned down this week, while the US stock market hit new highs, as “reflation” trades wilted under the pressure of concerns ove…
24 Jul 2021
Why the European Central Bank’s new regime matters more than you think
Inflation

Why the European Central Bank’s new regime matters more than you think

The ECB has said it will tolerate higher inflation and it won’t be raising interest rates for quite some time. It’s another big clue for markets – but…
23 Jul 2021
Can Latin America's economies recover from the pandemic?
Emerging markets

Can Latin America's economies recover from the pandemic?

Few places have suffered as much from the Covid-19 pandemic as Latin America. A sustained commodity rally could help.  
23 Jul 2021

Most Popular

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism
Economy

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in t…
16 Jul 2021
Why the UK's 2.5% inflation is a big deal
Inflation

Why the UK's 2.5% inflation is a big deal

After years of inflation being a financial-assets problem, it is now an “ordinary things” problem too, says Merryn Somerset Webb. But central banks st…
16 Jul 2021
Commodity supercycle or not, here’s a metal that’ll still be in demand – tin
Industrial metals

Commodity supercycle or not, here’s a metal that’ll still be in demand – tin

Commodity prices may have come off the boil recently. But for tin, the only way is up. Dominic Frisby picks the best ways to invest.
7 Jul 2021