Even just the mention of the “Iran Nuclear Deal” sounds ominous, especially in the context of oil prices. While the primary thrust of these international dealings is to prevent nuclear weapons from falling into (or being created by) the wrong hands, there are naturally questions that echo throughout many different economies and industries, with the energy sector perhaps being foremost of these.
What do the negotiations surrounding the conclusion of a 2-year standoff between core nations of the U.N Security Council and the Islamic Republic of Iran mean for the oil industry? Unfortunately, the answer isn’t completely cut and dried.
The six world powers negotiating with Iran require many things of the Islamic State, the foremost of which are:
A drastic reduction in the country’s uranium stockpile.
Limits on how much uranium Iran can enrich, and restrictions on the degree of enrichment.
Strong reductions and restrictions in how many centrifuges the country can run.
Requires in-depth, third party inspections of production processes.
That’s all fine and dandy, of course, but what does all that have to do with the price of oil anywhere? As it turns out, it’s what Iran wants in return that could potentially affect pricing: Removal of heavy economic sanctions.
These sanctions have essentially cut off Iran’s economy from the outside world. And that includes Iran’s biggest export: Oil.
Furthermore, lifting sanctions will immediately give Iran access to at least $100 billion. It’s not that they haven’t been selling oil, but rather that their revenue is frozen in overseas banks. There’s no telling what such a massive cash influx will have, especially with Iran’s history of funding terror groups.
Coming to a decision that stops Iran’s nuclear program while lifting Western sanctions on the country could add anywhere from 400,000 to 800,000 barrels a day to the market, which would immediately push down oil prices. Production could ramp up very quickly once sanctions are removed, and Iran already has somewhere in the neighborhood of 40 million barrels in storage.
Even though Iran promises that nuclear weapons are not part of their long-term strategy, the international community (and Israel in particular) has reason to be wary of their ultimate goals. And many U.S member of congress believe that the deal trades away American and Israeli security. International oil pricing in the future, in large part, is directly tied to Iran’s fate.
One thing is for certain, however: Prices have been down for a while, and are reaching multi-year lows. It isn’t clear just how much downside is left, but the Iran Nuclear Deal could prove to be a catalyst that turns the market around. However, any consistent exports from Iran could take some time to begin shipping out, even with their resources in storage. By the time production begins in full, the market demand could very well have rebounded.
Furthermore, Iran has set aside almost nothing for oil investments this year, due to the drop in prices. They fully intend to restore their previous market share, once sanctions are lifted, with a goal of increasing production by a million barrels per day.
Naturally, supply and demand will eventually balance everything out over time. A greater influx of Iranian crude could potentially force an even bigger adjustment from U.S. production, which may cause a deeper contraction in U.S. national markets.
There are still many unknown variables left in play with the Iran Nuclear deal. Nobody knows exactly how things will look once the dust settles (or even if Iran will stick to its end of the deal in the long run), but the fact remains that directly investing in oil and gas is one of the best ways to quickly see a return on your oil industry investment.
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