A revival of the Iran nuclear deal could significantly alter oil prices

A gas flare on an oil production platform is seen next to an Iranian flag in the Gulf.

Raheb Homavandi | Reuters

The return of the Iran nuclear deal could be imminent – ​​and with it, the return of a lot of oil to international crude markets.

Before the US resumed sanctions on Iran after former President Donald Trump quit the deal in 2018, Iran was OPEC’s third-largest producer after Saudi Arabia and Iraq. . In 2017, it was the fourth largest oil producer in the world, after the United States, Saudi Arabia and Russia.

“OPEC could easily produce 30.5 million bpd (barrels per day) if Iran comes back and those barrels aren’t supported,” Tamas Varga, an analyst at PVM Oil Associates in London, told CNBC on Tuesday. . “In this scenario, my model shows Brent falling to $65” a barrel in the second half of 2023, Varga said.

That’s a massive drop from the current price of Brent crude, which was trading at just over $101 a barrel Tuesday morning in New York.

Last week, Saudi Energy Minister Prince Abdulaziz bin Salman warned that OPEC could be forced to cut oil production. The minister’s reasoning was that the physical and paper markets are “disconnected”, with the latter suffering from “very low liquidity, extreme volatility”, he said in an interview with Bloomberg last week.

But Iran’s potential re-emergence in the market is also likely to be a concern, analysts said.

“OPEC+ could be preparing for the eventual return of Iran,” Varga wrote in a report on Tuesday. “If the nuclear deal were to be revived, an additional 1-2 million barrels of oil per day could hit the market in a relatively short period of time.”

And veteran OPEC analyst Helima Croft, head of global commodities strategy at RBC Capital Markets, told the Financial Times last week that “earlier this year, I think it’s fair to say that Saudi Arabia and other regional players were reasonably confident that the deal with Iran was not going to happen in the near future… Now that the negotiations have been restarted, I think they will focus on both on the oil market and the wider security implications of this deal likely to cross the finish line.

But will a deal happen?

In mid-August, Iranian negotiators expressed optimism about the prospects for a deal, with one adviser saying that “we are closer than before” to a deal and that “the remaining issues are not very difficult to solve”.

But so far, there seem to be a few sticking points that are proving quite difficult to resolve. The main point of contention between the Iranian and Western camps is an ongoing investigation by the International Atomic Energy Agency – the UN’s nuclear watchdog – into unexplained traces of uranium found at Iranian facilities in the early 2000s. Tehran wants the investigation to be closed before accepting any agreement; the IAEA and the US and European governments have so far refused.

The nuclear deal, officially called the Joint Comprehensive Plan of Action and drafted under the Obama administration with France, the UK, Germany, Russia and China, lifted economic sanctions against Iran in exchange for limits on its nuclear program.

However, since the US withdrawal in mid-2018, sanctions have crushed Iran’s economy of 84 million and Tehran has gradually ramped up its nuclear activity in violation of the deal, enriching uranium to the maximum. high level never enriched and prompting the head of the IAEA to warn that “only bomb-making countries” exhibit this level of activity.

That means the stakes are high, and especially for the Biden administration, which has listed reviving the deal as a key foreign policy goal. It has also become more urgent that sanctions against Russia over its invasion of Ukraine will reduce Europe’s oil and gas supply and drive up prices. Although Iranian oil will not fully offset the loss of Russian barrels, it would still help ease supply pressures, analysts said.

“A deal with Iran would mean an additional 1.1, 1.2 million barrels per day in crude exports, production and exports. That would happen over the next eight months. So we would have a material difference on global balances,” said Reid l’Anson. , senior commodity analyst at commodity data firm Kpler.

But Anson doubts the likelihood of a deal being struck, and he’s not alone.

“The question moving forward is whether we’re actually going to see a deal,” he said. “I still think we probably won’t do it just given the fact that it’s politically unpopular in America and even in Iran.”

Bob McNally, president of Rapidan Energy Group, was more optimistic.

“We think a deal is likely; we think it’s always been pretty close and it’s getting a lot closer,” he said.

“Iran has about 150 to 200 million barrels of crude and condensate floating on the water. As soon as the deal is done … you will have a rush on this sale of stored oil,” he said, believing that Iran would increase its production. around 900,000 barrels per day.

This means a significant increase from the current production level of around 30 million barrels per day, unless OPEC members drastically reduce their oil production. “That’s something OPEC and OPEC plus need to consider and think about when thinking about oil supply policy,” McNally said.

Given recent comments from the Saudi energy minister, it appears the group is considering it. But the longer the Iran deal negotiations remain stuck on points of contention, the more OPEC needs to prepare — assuming a deal is reached.

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