Nuclear deal paves way for return of Iran oil

Earlier today, Iran and the so-called P5+1 group of countries (China, France, Russia, the UK and US + Germany) agreed on a Joint Comprehensive Plan of Action (JCOA) set to constrain Iran's nuclear programme in return for sanctions relief. 


The nuclear deal and removal of sanctions on oil exports is thus negative for the oil price. The past two weeks' 10% slide below USD58/bl for Brent and the relatively modest price reaction today probably means the effect of the deal is already reflected in the oil price to a large extent. The long implementation lag of the deal means that there is still a probability that implementation of the deal could fail and this risk factor is likely to keep volatility in the oil market high in coming months, particularly as the deal will probably find strong opposition not only in the Middle East but also in the US congress. As a consequence, the oil market forward curve has steepened over the past two weeks. 

"The nuclear deal means there is a risk it will be to a lower level than we currently forecast, i.e. USD75/bl in Q4 and USD78/bl in 2016 for the price of Brent crude", estimates Danske Bank.


A removal of sanctions on Iran's oil exports would have implications for the oil market both in the short term and in the medium term. In the short term, Iran has significant oil stockpiled in tankers ready to be shipped to Europe and Asia - probably around 30m bbl according to indications. In the medium term, Iran will look to raise production by up to 1mb/d back towards full capacity and thereby permanently increase its oil exports. 


According to Danske Bank, "Iran has low production costs in the range of USD5-30/bl and the economy badly needs the additional export revenue, so Iran is not likely to hesitate in exploiting its full potential. Furthermore, its low-cost oil should have no problem competing for market share with higher cost European oil."