Iran has finally got out of the woods as it reached a nuclear deal with six major world powers on Tuesday. The agreement involves the curbing of Iran’s nuclear program, in exchange for a relief in economic sanctions. The lifting of the sanctions will directly result in more crude flowing into the already oversupplied global market, thereby putting crude prices under pressure.
This nuke deal has fueled passionate reactions, which are mostly centered on military concerns and geopolitical what-ifs. Although sociologically speaking, these are valid points to consider and evaluate, market participants have other considerations to weigh.
For instance, investors are primarily concerned about the conditions that are affecting the different financial markets over the next year or so. With this, an important question will be: What are the predictable implications of the Iranian nuclear deal on the global oil market?
Many have already debated the effect of the agreement on the prices of oil and the Energy industry. It has long been known that once a deal is reached, Iran will be permitted to boost its oil exports. Currently, Iran is producing 1.2 million barrels of oil daily, and the OPEC member intends to push this number up to 2.3 million barrels per day.
It can be said that prices of crude have started to reflect the negative effect as crude prices are declining. Over the next few months, we might see oil prices sliding below the $50 per barrel mark and even slump further. However, the short-term movements in oil prices are directly resulting from panic.
Sure, Iran would add pressure on crude prices, but investors shouldn’t expect oil to decline anew. Even with the OPEC member partially absent on the global market, there are still numerous price pressures. Since the September of 2014, the global supply growth has exceeded the demand growth.
Moreover, market participants should also dispel the idea that global oil prices will soon crash. Yet, it is important to keep in mind that this nuclear agreement is another reason for oil prices to continue bouncing around the current low levels.
When the nuclear deal is implemented, Iran will not be able to ramp up its production of crude over the next few months. Of course, the country will need some time to increase its production back to the pre-sanctions level. In my opinion, we will see the real effect of this agreement on the global oil supply in approximately six months. The prices of oil will also remain under pressure in the short to medium term because of the increased supply.
Overall, the effect of Iranian oil for the global market will be a negative one. However, it can be the case that lower prices of crude might stimulate higher levels of consumption from the emerging economies. Even if this will turn into reality, investors should also know that achieving the balance between the supply and demand is not easy and will not occur immediately. Perhaps, it will take about two years and these two years will definitely be difficult for energy companies, especially those with high cost structure that are focusing on crude only. With this, I strongly recommend that market participants focusing on the energy sector take caution in these unpredictable times.