The freshly-inked deal between Iran and world powers will have far-reaching implications for global markets, notably commodities. The nuclear deal is intended to prevent the Islamic Republic of Iran from obtaining a nuclear weapon and to keep a close eye on the country’s nuclear program. Top diplomats from China, the U.K., France, the U.S., Russia and Germany were locked in marathon negotiations with Iran to end the country’s international isolation, while simultaneously preventing it from acquiring nuclear weapons capability.
U.S. President Barack Obama and Secretary of State John Kerry insist that the Iran deal is based on verification, not blind trust. Failing adherence to the terms of the nuclear deal, Iran will be slapped with the full weight of economic sanctions. Now, Congress has 60 days to pick at the deal but Obama has vowed to veto anything that prevents the deal’s implementation. Similarly, Iran’s Supreme Leader must support the deal for it to pass through. With politics aside, traders are considering the economic implications of an Iran deal on the commodities markets.
How Iran Can Influence the Global Oil Market
Iran presently has 30 million barrels of oil that it is ready to offload onto the market. Soon after news of a deal broke, the price of Brent Crude oil dropped sharply to $50.98 per barrel. Commodities experts are deeply concerned that downward pressure will be brought to bear on oil prices as Iran’s glut of oil now comes into the picture. However, as news has emerged about Iran’s readmission into the global commodities markets, it became clear that the influx of Iranian crude oil will be gradual. According to leading analysts, Iran will be able to export as much as half a million barrels of oil per day only by mid-2016.
Iran will be subject to ongoing restrictions by monitors from UN, and the sale of Iranian crude is only likely to gather momentum after the December 2015 report on compliance is finalized. There is the belief that the gradual increase in oil supply will come at a time when demand has increased and the need for additional oil supplies can be met by Iran’s surplus. The historic accord with Iran had an immediate impact on U.S. shale oil producers, with WTI (West Texas Intermediate) oil dropping to $51.89 p/barrel in early morning trading on the NYME. Likewise the international benchmark – Brent Crude dropped on the ICE to $57.26 p/barrel. Iran has been given until the 15 December 2015 to answer hard questions about its nuclear and ballistic weapons program. When Iran is ready to re-enter the global market, supply will exceed demand by 800,000 barrels per day on the proviso that OPEC nations (led by the Saudis) maintain production at current levels. The Saudi Arabians are bitter enemies of Iran and it is uncertain how relations will play out between them. Iran is currently the world’s 4th largest supplier of crude oil. It also boasts the world’s second largest natural gas reserves. The re-introduction of Iranian crude will keep prices at the pump lower for longer. This will not please oil and gas companies, but it will most certainly please consumers in the short to medium term.