Will the deal with Iran dampen oil prices?

published 9 April 2015

The permanent members of the UN Security Council, along with Germany, have reached a tentative deal with Iran. Some Western sanctions on the country will be lifted if it dismantles some of its nuclear programme, a step to be verified by the International Atomic Energy Agency (IAEA). A final deal is to be signed in June, assuming hardliners in Tehran and the US Congress approve this preliminary effort. This paves the way for a resumption of Iranian oil exports, raising the prospect of yet more oil hitting an already oversupplied market. The oil price fell by around 5% on news of the deal, but has since recovered.

What the commentators said

However, oil's recovery in the past few day suggests the impact may not be that dramatic. Assuming all goes well with the ratification process, "we do not expect any physical market impact before 2016", said Morgan Stanley's Adam Longson. It will take time for the IAEA to verify that Iran is sticking to its end of the bargain. And recent underinvestment in the oil sector could hamper exports if sanctions are lifted. Exports may increase by only 500,000 bpd to 700,000 bpd.

Without a significant rise in production, it will be hard to maintain high exports, agreed Capital Economics, even if stockpiles are at the high end of estimates. Many of the country's oil fields need a lot of time and money to revive. The upshot? The return of Iranian oil will dampen prices over the next few years. But it "probably won't be enough to offset the impact of lower US shale oil production and higher demand" caused by falling prices. Brent is still likely to reach $65 by the end of next year, up from just under $60 today.

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