Whatever the merits of doing a deal with Iran over its nuclear enrichment program – and the proposed deal does seem to be polarizing opinions – the market’s reaction was a sharp drop in the oil price as tracked by the Brent Crude benchmark.
As the markets assimilated the details, though the price recovered pretty much to its Friday level, in itself, the Friday price, at over $110/barrel, was a high for the month of November – reached only because the market feared a deal was looking less likely.
The reaction on Monday could have been expected as expectations of a resumption in Iranian oil exports caused a sell-off in speculative longs, but as they say, the devil is in the details and on closer reading of the State Department’s post-agreement fact sheet (which stated, “In the next six months, Iran’s crude oil sales cannot increase”) made the markets take stock.
Don’t Expect An Iran Oil Comeback
The expectation now is Iranian crude will not be flooding back onto the market anytime soon.
The FT says that in the short term, Iranian exports may receive a limited boost from current levels, estimated by traders at up to 1.2 million barrel per day, as the remaining large buyers of the country’s crude feel less pressure to further reduce imports.
However, a return to pre-sanctions levels of exports of around 2.5 million barrels per day is not on the cards for now.
China, India, Japan and South Korea account for the vast majority of Iranian crude purchases, after the US granted them waivers from sanctions in return for reducing purchases. The EU market, by contrast, is closed as Europe was an early and comprehensive adopter of sanctions against the regime.
The most likely buyer to increase imports is India, which has been hampered as much by being denied access to insurance and shipping via the London markets as by any compunctions to handle Iranian crude.
So what’ll happen to prices? Continued in Part Two.