What has actually been agreed?
Its not exactly clear, differing reports from Iran and the United States in the wake of the negotiations show that there are many details yet to be agreed upon. What appears to be clear though is that the U.S. and its partners were able to secure important nuclear commitments from Iran that will make getting a final deal possible.
So is that the end of it?
No, the final agreement has not been written and the details required to successfully complete the negotiations still likely to prove controversial. It is likely that June 30th will arrive with still no clarity as to whether a final deal will be achieved or not. There is still much that can go wrong that could scupper a deal, namely hard liners in the US and Iran.
When will Iran oil related sanctions be removed?
It has not been determined which sanctions will be lifted, by how much and in what order.
The 5+1 will likely stipulate as part of the deal, Iran’s compliance with the restrictions on its nuclear program, i.e. the US and its allies will want to make sure Tehran is satisfactorily holding up its end of the bargain before starting to eliminate any of the sanctions.
No one knows exactly how long that could take. Consider the fact that modifying nuclear equipment, tearing down over 10,000 centrifuges and carrying out highly-detailed inspections can take months under normal circumstances.
Even under the most optimistic scenarios it is thought unlikely that relief of oil sanctions will start until 2016 at the earliest.
So this is going to make the crude glut much bigger?
Despite fears that lifting sanctions will flood the market, the reality is likely to be quite different.
The Iranian authorities assert that the country could increase production from around 2.8 million b/d to around 4 million b/d while doubling exports.
However, turning the oil taps back on ignores the technical realities involved after oil wells have been switched off for some time. Given current market conditions, only limited international investment will likely be available to help restart its production. For one thing, Iran is not thought to have offered particularly attractive terms to investors and at today’s oil prices, oil companies are cutting back everywhere.
It appears highly unlikely that Iran will be able to increase production until sometime in 2016 with Deutsche Bank (XETRA:DBKGn) forecasting an additional 400,000 b/d by mid-2016.
The one supply of crude that Iran could tap immediately are the 30 millions barrels of crude they have in storage. Energy Aspects estimate that tapping storage could add an additional 100,000 b/d or so to current exports of 1.3 million b/d.
Won’t this make OPEC’s job even more difficult to achieve?
Any rebound in exports is also likely to lead to further internal pressure within OPEC to cut production so its another uncertainty for them to manage. But OPEC have been here before in managing Iraq’s return to higher levels of oil production and exports.
Any rebound in crude exports needs to be seen in the context of production outages elsewhere. Despite the prospect of exports increasing from Iran, escalating unrest in Libya and problems in Iraq has resulted in production being cut in these key OPEC producers.
What about oil prices?
A successful lifting of sanctions is bearish for Oil prices. But as we note this is a long way off. Once the realisation dawns that Iranian crude is not going to flood the market any time soon prices could rebound. It could be a case of sell the story, buy the fact.
What are the broader risks?
If Iran is perceived as having an insufficiently limited nuclear program then there is a risk of a wider nuclear arms race in the Middle East. Last week Saudi Arabia refused to rule out the acquisition of its own nuclear weapons capability. The conflict in Yemen (thought to be supported by Iran) and now Saudi Arabia and other regional states involvement on the other side have raised fears of a wider conflict between Saudi Arabia and Iran. Any move in this direction would put oil production and major crude shipping routes at risk, significantly increasing the risk premium to crude prices.