The emerging nuclear accord between Iran and the P5+1 negotiating team sets the stage for another round of losses in the oil patch with global output forecast to grow on the back of reduced sanctions. There are some hurdles to finalizing any deal, mainly with respect to US Senate confirmation and legislation being considered in the Iranian Majlis. However, the deal agreed upon in Vienna does not mean an immediate lifting of sanctions, but in fact quite the contrary. The lifting of sanctions is dependent on implementation of the terms and conditions for a deal to actually be signed, meaning that Iran is not going to see burdensome restrictions lifted from the economy until compliance with the terms is verified. Nevertheless, the kneejerk reaction in oil markets today was negative as the prospect of expanded global production could deepen the retreat in oil prices in spite of the fact that impediments to finalizing the deal remain.
In the event that Iran complies with the terms set forth by the agreement, it establishes a framework for western companies to once again begin transacting with the Islamic Republic. The nation is desperate for foreign investment amid serious domestic economic problems exacerbated by being excluded from the global financial system. One area the Iranians are keen to focus on is rebuilding the nation’s fledgling oil sector which has great potential but languished under sanctions. Economic restrictions prevented the nation from applying updated extraction and capture technologies to raise production levels to formidable levels. Iran’s oil reserves are the fourth largest in the world with current exports at 1.20 million barrels per day with expectations that the figure could quickly reach 2.30 million barrels per day. While there are doubts as to the veracity of this claim, any additional production would add to the 2.00 million barrel per day supply imbalance which currently threatens oil prices. Although no imminent change to the prevailing situation in the energy patch situation, Iran has the potential to upset the delicate balance and push prices back toward the dreaded $20 per barrel level.