US and EU sanctions on Iranian oil exports will remain intact for the next 6 months, but the psychological impact of the Geneva deal might in fact lower oil prices.
Opinions on last Monday’s nuclear deal between Iran and the P5+1 countries are vehement and varied. It appears the only point of agreement is that Iranian oil will not flood the market, at least not for another six months.
Following the announcement of the interim agreement, the Brent Crude fell by 2.7%, to $108.05, in what analysts are calling a “knee-jerk reaction,” even as US and EU oil sanctions remain unchanged and Iranian oil output will not contribute to a dramatic increase global supply.
While the interim agreement relaxes sanctions on petrochemicals and shipping insurance, Iranian crude oil sales remain capped at about 1 million barrels per day (bpd) and, according to the White House post-agreement fact sheet, “cannot increase.” ClearView Energy Partners predict that lifting the ban on shipping insurance might increase exports to Iran’s current customers (China, India, Japan, South Korea, Turkey and Taiwan) by 200,000 to 400,000 bpd. However, no real increase in oil exports can be expected until the two sides can reach a final settlement in the next six months.
Some analysts have suggested that oil prices may in fact drop – not because of increased output, but due to an easing of regional and global tensions. Forbes energy reporter Christopher Helman estimates that, at the height of former President Mahmoud Ahmadinejad’s “bellicose anti-Israel rhetoric and threats to blockade the Straights of Hormuz,” geopolitical risk added a premium of nearly $20 per barrel to oil prices.
IHS analyst Simon Wardell also identifies the threat of military conflict as one of the factors that had elevated oil prices. The main benefit of the deal might be the psychological impact on the market. With the geopolitical risk of an unfriendly Iran assuaged, the energy market might better reflect fundamental supply and demand.
Citigroup predicts that the Geneva deal will shave off $13 per barrel over time, enough to sink Brent Crude below $100. Lower prices benefit oil-importing countries but could spell trouble for countries reliant on oil exports to balance their budgets.
The fiscal break-even point is near $120 for Algeria, Bahrain and Nigeria, $117 for Russia, and $110 for Venezuela and Iraq. Saudi Arabia’s break-even point has jumped to $98 (due to increased spending to avert social protest), though Riyadh states its economy could withstand a price decline up to $20 to $25 per barrel. Its bigger worry is likely the changing regional power dynamics.
Even America’s much-touted shale boom relies on sustained high oil prices. If the crude benchmark were to fall to $75 per barrel for a few months, North Dakota and Texas drilling might be too expensive to continue.
Iran’s intent to increase its oil exports in the coming year is quite clear and portends an additional downward pressure on prices.
Though Western companies are barred from investing in Iran under EU and US sanctions, Iran’s oil minister, Bijan Namdar Zanganeh, has been indirectly meeting with American and European firms with the intent to invite them back into Iran. Attempting to draw in $50 billion in foreign investment and secure access to technology, he and his team are tackling energy subsidy reform and reviewing the terms of oil contracts to make them more attractive. Western firms will not be able to take advantage of these changes until after the sanctions are lifted, but Zanganeh credits the Geneva meeting with lifting psychological sanctions, indicating that countries can now invest in Iran without fear of damaging their international reputation.
However, it remains to be seen when and by how much oil prices will drop in the coming months. Instability persists in Libya, Iraq, Nigeria and Sudan, which might perpetuate the geopolitical risk premium built into prices.
And even though Iran is sitting on an estimated 37 million barrels of crude that it could not previously export and has the fourth-largest reserves in the world, it is unclear how much it will be able to release to the market. Its exports will depend on negotiations with its fellow OPEC countries, which have been silent thus far.
Though oil prices have corrected since the quick drop on Monday, the Geneva deal has the potential to change the global oil landscape profoundly in the long run.
