Iran deal may not have long term impact on oil price

26th November 2013

The agreement between Iran and Western powers may have a relatively limited long term impact on the oil price say analysts at ETF Securities.

Edith Southammakosane, senior analyst at ETF Securities also suggests the fall in the oil price may be an overreaction.

A note issued this week says: “The agreement Iran signed over the weekend with the US, Russia, China, Germany, France and the UK on its nuclear programme is a first step to ending the international embargo on Iranian exports.

“During a period of six months from the agreement, the six countries have agreed to suspend the next set of sanctions in exchange for proof that Iran will limit its nuclear programme. While it is understood that no additional sanctions will be applied to Iran during this wait-and-see period, the existing embargo on Iran oil will remain in place and a failure by the country to comply with the terms of the agreement by the end of the period will likely add upward pressure on oil prices again.

“If Iran does actually meet the agreement’s criteria and if, as part of the next step, it is decided to lift the embargo on oil at the end of the six months, Iran oil production is likely to recover quite quickly to pre-embargo levels, potentially bringing OPEC annual oil production back to 30mb/d.

However, even under this optimistic scenario we believe that the longer term impact on the oil price will be relatively limited. New sources of production from the US and other countries have substantially changed the dynamics of the oil markets, reducing Iran’s influence on global energy markets.

“Even before the embargo, Iran’s oil production as a percent of global supply had declined to 4.2% compared to 4.6% five years ago and had dropped to 3.1% since the embargo came into force. Therefore, we believe the drop in the oil price following the agreement was an overreaction to the news”.

The note suggests that in the next 6 months there is likely to be little change in Iran’s oil exports. “Increased seasonal demand from the winter heating season in the northern hemisphere, increased demand from refiners as maintenance work is completed, and the strong outlook for US and China growth should help shore up prices in the short term in our view. We expect Brent to range trade between US$100-US$120/bbl and WTI to recover to above US$100/bbl”, it adds.

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