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

What escalating tension between Iran and the US means for oil prices
Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020
Rising output will keep a lid on the oil price
Oil

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019
Brace yourself for pricier oil
Oil

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019
Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020

Most Popular

The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020
Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
Why you should stuff your end-of-pandemic portfolio with Chinese stocks
China stockmarkets

Why you should stuff your end-of-pandemic portfolio with Chinese stocks

For an end-of-pandemic portfolio, you need assets that can cope with today’s volatility. And that, says Merryn Somerset Webb, means Chinese stocks.
14 Sep 2020