Oil Price Falls On Iran Nuclear Deal‏

Iran and the so-called P5+1 group of major countries struck an interim six-month deal on Iran's nuclear programme on Saturday.

The deal constrains Iran's nuclear programme in return for limited sanction reliefs - among other things, Iran can maintain its oil exports at the current level.

The market reacted by sending the oil price down to USD108-109/bl on Monday morning, from USD111/bl on Friday.

On Saturday, Iran and the so-called P5+1 group consisting of the US, UK, France, Russia, China and Germany agreed on an interim deal regarding Iran’s nuclear programme. The deal constrains Iran’s nuclear programme and, in return, Iran has been giving limited sanction reliefs (see White House Fact Sheet for further details). Key points from the agreement are as follows.

The deal runs for six months as the two sides continue to work on a final agreement.

It allows Iran to maintain oil exports at the current level of around 1 mb/day (60% below pre-2012 sanctions level) and no new sanctions will be put on Iran’s oil export.

The sanction relief is reversible if Iran fails to live up to its side of the agreement.

The deal is a major step forward in the negotiations on Iran’s nuclear programme following a decade of struggles. Brent Crude January 2014 is currently trading around USD108-109/bl – down around USD2/bl since Friday. As Iran is not allowed to increase its oil exports, the effect probably reflects relief in the market that the sides are finally moving closer together and an expectation that the momentum will continue to grow. However, a permanent deal in six months remains far from a done deal. Israel and Saudi Arabia have already (not surprisingly) voiced their opposition to the deal and so have some members of the US Congress. Furthermore, it also remains to be seen whether Iran will live up to its obligations as part of the agreement.

If the parties can build on the current momentum and land a final agreement over Iran’s nuclear programme, Iran would, in return, probably be allowed to regain access to the global oil market. This would have two significant effects on the oil price.

A positive supply shock from increasing global oil production and oil exports (Iran has the world’s fourth-largest oil reserves). This would be negative for the oil price. However, note that Saudi Arabia would be likely to adjust its oil production to dampen the price decline.

A deal on Iran’s nuclear programme would be likely to ease geopolitical tensions in the Middle East. This would also be negative for the oil price as the geopolitical premium declines.

As we argue in Commodities Research: What if Iran’s oil returns to the market?, 20 November, a fall below USD100/bl from the current level around USD109/bl would not be an unthinkable consequence of a final agreement that allows Iran’s oil to return to the market.

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