Oil prices could fall again after the historic diplomatic deal reached between the US and Iran this week.
Iran is a major oil producer, and the US lifting economic sanctions against the country will mean a ton of new crude coming on to the market — to the tune of about 1 million barrels a day, according to Nick Cunningham at Oilprice — in a world that is already oversupplied by about 1.5 million barrels.
Cunningham thinks this is huge for the market:
The immediate effect of a deal, regardless of Iran’s long-term ability to boost output, is hard to overstate. The mere act of coming together to sign a deal would be an enormous blow to U.S. shale companies. A $US5 drop in oil prices and the expectation of forthcoming Iranian crude would keep oil prices depressed much longer than analysts had predicted. Speculators would rush out of oil and the bear market would continue throughout the rest of this year, putting more financial pressure on weak U.S. drillers. More write-downs and bankruptcies could be expected.
FBR Capital Markets sent out a note to clients analysing a potential deal earlier this week. Its analysts think it will take six months for Iran to ramp up exports. And there are significant caveats, including a question as to whether it really can produce 1 million barrels a day:
We believe removal of the cap on oil exports is a top priority for Iran, but the principle of reciprocal easing means that exports would need to happen in concert with verification of some aspect of Iran’s obligations. Dismantling centrifuges, modifying a reactor, or conducting inspections all take time. Likewise, if the export cap is removed, commercial issues could be a drag. Iran’s current customers may be able to increase imports, but additional exports to European customers would require a change in EU law, and companies may be wary of doing business in Iran if U.S. sanction relief only takes the form of temporary presidential waivers. Finally, the extent of Iran’s productive capacity remains in doubt. Iran likely has significant stored oil, but without significant investment, it may struggle to sustainably add the 1 MMbbls/d promised by its oil minister.
Oil prices have been in the red all day.