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Wednesday, July 15, 2015

What Iran's nuclear deal means for the oil price

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July 15:

A research note from Goldman Sachs stated that the Iran deal would have little impact on oil output in 2015.

A research note from Goldman Sachs stated that the Iran deal would have little impact on oil output in 2015. Photo: MCT

Oil prices have recovered after initially plunging over the deal reached with Iran's nuclear program, as analysts ponder the details and the roadblocks that remain in its implementation.

Brent crude oil fell from $US58.70 a barrel to $US56.50, as the world pondered a torrent of Iranian oil flooding the market. But by Wednesday, prices were back up at $US58.70. 

"The devil is in the detail," said ANZ senior commodities strategist Daniel Hynes. "Initially the market sold off on it - I think it was down 2 per cent on the original announcement - but prices have recovered somewhat after the details emerged.

"It suggests we're not going to see additional Iranian crude oil for at least six months. And even in that case, there's a lot of question marks as to how sustainable the uplift that they're suggesting could be.

Mr Hynes said there were a lot of question marks over the deal, which has not yet been ratified by the US and Iranian legislatures.

"Iran is talking about doubling exports to 2 million barrels a day, but that would require domestic production to increase as well. Are their assets in a condition that would sustain these types of levels?"

However, assuming the deal was implemented, oil prices would face further downward pressure, he said.

"This is happening when the market is expecting a cut, not an increase, from a major producer. This is going to be bearish for prices despite the delay in that expected supply hitting the market."

Other analysts were also guarded about the impact of the Iranian deal on the crude oil market. 

"The deal could still be disrupted by hardliners in both Tehran and Washington," said a note from Capital Economics commodities economist Thomas Pugh. "In the short term, at least oil prices are more likely to be influenced by sentiment towards commodities in general and by developments in China in particular."

The size of Iran's stockpiled oil was unknown, said Capital, with estimates ranging from 7 million to 35 million barrels. Furthermore, Iran's oil fields were aging and not capable of full production without significant investment.

"The upshot is there is unlikely to be much additional Iranian oil hitting the market this year," said Capital. "In the near term, broader macroeconomic and financial developments are likely to have a larger effect on oil prices than changes in Iranian exports."

A research note from Goldman Sachs stated that the deal would have little impact on oil output in 2015. "An increase in Iranian oil exports can only occur once sanction relief occurs, tentatively in early 2016...we continue to expect that the recovery in Iran oil production and exports will be gradual.

"The timeline of the sanctions relief implies that this agreement will have no impact on 2015 oil balances."

But Goldman Sachs said that 2016 could be a different story. "We view the 2016 prospects for higher OPEC production, including from Iran, as a growing downside risk to our oil price forecast."

Matt Sherwood, head of investment strategy at Perpetual, said that oil prices had declined 10 per cent in the past fortnight as investors priced in a deal.

Iran was the world's fourth-largest oil producer, said Mr Sherwood, and the deal "has a lot of potential". "It will initially spark increased volatility in global energy markets as supply chains adjust to the new production will eventually reduce supply risk and this should contain the upward momentum in global oil prices, which is good for growth and inflation."

Analysts Wood Mackenzie and Verisk Maplecroft noted that Iran had the world's third-largest oil and gas reserves, behind Russia and Venezuela but ahead of the US and Saudi Arabia.

"Three quarters of its total recoverable reserves are yet to be produced," they said.

Iran could add another 600,000 barrels per day to the global oil market by the end of 2017.

Chief energy economist at Kepler Cheuvreux, Mark Lewis, said that despite the Iranian deal, "we stick with our year-end Brent forecast of $US75 per barrel".

Mr Lewis said it would be the second half of 2016 at the earliest - and more probably late 2017 - before Iranian oil exports returned to 2012 levels. 

"We think the challenges to Iran ramping up exports quickly are significant, while we also expect US shale-oil output to show a clear decline by third quarter 2016."


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