How Iran nuclear deal may affect falling oil prices

A drop in the worldwide price of oil might mean more than just lower prices at the pump. It could be pushing Iranians closer to a pact to limit the country’s nuclear power. And that may push oil prices — and thus gas prices — even lower.

A deal between Iran and six Western countries that would limit Iran’s nuclear capability also would ease economic sanctions against Iran. That eventually could translate into half a million barrels or more in Iranian crude oil added daily to a glutted global market, says an online story on The Wall Street Journal’s Market Watch.

Last winter, some were claiming that lower oil prices were putting pressure on Iran to strike such an agreement. A report by Roubini Global Economics and Securing America’s Future Energy, a nonpartisan group led by business and military leaders, said the worldwide oil glut “means the West doesn’t need Iranian oil and has more leverage to negotiate,” according to a story from McClatchy DC News.

“For the first time since the United States and other world powers confronted Iran over its nuclear program in 2006, today’s oil market conditions allow [the negotiators] to work toward the best possible deal without risking oil price volatility and damaging consequences for the global economy,” said Sam Ori, the executive vice president of the energy group, the McClatchy story reported.

Crude oil prices are at a six-year low, now below $43 a barrel. Sanctions against Iran have limited how much the country can sell on the world market. According to a story on CNN, Iran exports only 1.3 million barrels a day now, compared with 2.5 million barrels a day in mid-2012. Sanctions have crippled Iran’s economy; inflation has soared, and youth unemployment stands at over 20 percent.

For full economic recovery, Iran must expand oil sales and hope for oil prices of $130 a barrel, according to Deutsche Bank, the CNN story reported. If sanctions are lifted, Iran can start selling, but not at prices that would help its economy right away. Still, oil is Iran’s biggest commodity, and it must start selling more — at whatever price — to recover.

“They are in a Catch-22. The more they start exporting, the more the price of oil is going to go down,” said Brenda Shaffer, a visiting researcher at Georgetown University, according to the CNN story.

Some analysts are skeptical that Iran could return to full exporting capacity any time soon. According to a story in the Financial Post, Iran’s oil minister claims that the country could increase exports by 500,000 barrels per day immediately after sanctions relief, rising to four million barrels per day in three months. But Helima Croft, global head of commodity strategy at RBC Capital Markets, calls Iran’s claims “overly optimistic, even if a final deal and full sanctions relief are put in place,” the Financial Post story said.

OPEC, the Organization of Petroleum Exporting Countries, says it is counting on China and countries throughout the Middle East to drive up demand for oil — and thus the price, too.

U.S. shale oil is more expensive because it is more expensive to produce. Analysts have long speculated that high oil production by OPEC nations and the drop in oil prices are an attempt to limit U.S. oil production. But as oil gets cheaper, there’s something else that’s dropping worldwide — oil storage capacity. Adding more oil to a glutted market doesn’t help if there’s nowhere to store it.

There is a self-imposed deadline of the end of March to hammer out an overall framework for an agreement on Iran’s nuclear capability. The parties then would have until July 1 to reach a final pact.

And despite a letter signed by 47 Republican senators intended to sabotage the talks, Americans seem to think negotiating a deal to limit Iran’s nuclear reach is a good idea. According to a CNN/ORC poll, nearly 70 percent of people in the U.S. are in favor of direct diplomatic negotiations — a sentiment that crosses party lines, with 77 percent of Democrats, 65 percent of Republicans, and 64 percent of independents in favor of the talks.

Most observers, including the White House, put the chances of an agreement at 50-50. There are still disagreements over the scale of Iran’s nuclear infrastructure, the pace of sanctions relief, and the extent of nuclear site inspections, according to another CNN story.

Another possible wrench in the works is the attempt in the Senate to pass a bill that would provide for congressional review and oversight of any agreement relating to Iran’s nuclear program.

In other words, stay tuned.

 

 

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