Iran deal could lower oil prices

Associated Press

NEW YORK

Oil prices could be headed lower after the preliminary nuclear deal between Iran and six world powers, even though it does not allow Iran to export more oil.

In the short term, the deal may make it easier for Iran to sell the oil it already is allowed to sell under the sanctions, which would increase supplies on the world market. And the newfound cooperation between Iran and the West eases tensions that pushed oil prices higher in recent years.

But the deal, described by both sides as only a first step, raises the possibility that a more comprehensive agreement eventually would allow Iran to restore oil production to pre-sanctions levels. That could add 1 million barrels per day of oil to world markets — enough to meet the entire global growth in demand for 2014 projected by the International Energy Agency.

“The initial reaction is going to be a more stable oil market,” says Anthony Cordesman, a Middle East and energy expert at the Center for Strategic and International Studies in Washington. “But everything will depend on if there’s a final agreement and how it is implemented.”

Iran reached an agreement Sunday with the U.S. and five other world powers to freeze its nuclear program for six months while the two sides work on a more permanent deal covering Iran’s development of nuclear technology. In exchange, some sanctions against Iran will be relieved, and it will get access to some frozen overseas assets, including $4.2 billion in oil revenue.

Kevin Book, an analyst at ClearView Energy Partners in Washington, predicts the price of Brent Crude, an international benchmark used to price oil used by many U.S. refineries, could fall to $90 a barrel by the end of next year if talks yield a final agreement. That’s 19 percent below Brent’s level Monday, where it closed down 5 cents at $111 a barrel.

Analysts caution, though, that if talks on a final deal fall apart — or even appear to be faltering — oil instead could rocket higher. Iran and the West have appeared to be close to an agreement on nuclear issues in the past, only to abandon talks and descend deeper into acrimony.

“Even the slightest hint of an unraveling of the Geneva accord could restore a vibrant risk premium to crude,” Book says.

But oil prices appear to be headed lower for now, in part because the prospect of more Iranian oil is coming at a time when production is rising in the U.S., Canada, and elsewhere, helping global supply growth outpace the growth in demand.