Energy pundits are focused. The Iran nuclear deal is under spotlight. What would be its implications? What impact it would have on global crude balance and how would markets react? Significant questions indeed. An interesting analysis in the Saudi Gazette  provides some answers.
Consensus seems emerging – the fear premium is dwindling. Trends are getting visible – markets are softening. Yet there is confusion too – all around. The most perplexing issue confronting is; where would it all stabilize? Would it unleash a flood of oil into the markets? And who would be the loser in the total picture? How would other OPEC  members react to the emerging scenario? Would they feel threatened?
A global deal to lift sanctions against Iran could unleash a flood of oil on to world markets by next year, just as crude output recovers in Libya and Iraq, triggering a slide in prices and a major shake-up of the energy landscape, Ambrose Evans-Pritchard writing for The Telegraph  said in the immediate aftermath of the deal. The accord should unlock 800,000 barrels per day (bpd) of global supply by next year in a market of 89 million, rising over time as the Iran’s oil industry comes back to life.
And Iran has begun working, rather immediately. It has little time to lose. Oil ministry in Tehran is now in contact with western oil majors in anticipation of an ultimate deal and the eventual lifting of sanctions on its energy industry. Bijan Namdar Zanganeh, Iranian oil minister told the Financial Times he had meetings with European companies and “indirectly” with US firms with a view to inviting them back to Iran.
And most oil majors appear too keen to re-enter. When asked if Total would return to Iran if sanctions were lifted, Christophe de Margerie, chief executive of the French energy group, replied: “Of course.”
Total’s  head of exploration and production for the Middle East, Arnaud Breuillac, was rushed to Tehran to meet the head of Iran’s national company, Rokneddin Javadi, to assure him that Total would resume oil and gas operations in Iran as soon as sanctions were lifted.
Others are not much behind. Peter Voser, Shell’s outgoing CEO, told an industry conference last month that Iran had “vast resources” of oil and gas and “in the longer term, (its) hydrocarbons will have to be developed to meet (rising world) demand.”
Iran’s nuclear deal with the West will make it easier, cheaper and less stressful to trade its oil, thanks largely to a partial lifting of the European shipping insurance ban, a senior Iranian industry official was quoted by the global press last week.
“Based on this deal, Iran’s crude oil exports will not decline (further) and our customers will be able to purchase oil from Iran without any anxiety and they will not have to look for alternatives,” Ali Majedi, the Iranian deputy minister for international affairs and trading, told oil ministry news service Shana.
“No new sanctions will be slapped on Iran’s oil industry in the coming six months and our customers can clinch term contracts with Iran instead of spot oil consignments purchased from National Iranian Oil Company .”
While no one expects an immediate impact on Iran’s exports from the interim deal, the accord did signal that the long-running nuclear dispute had a good chance of being resolved. “It sends a positive signal to start negotiations. It will also lift what the minister called “psychological sanctions.”
“It’s a step, but it’s not like the end of a sanctions regime, not like it’s going to have a significant impact on the real balances of supply and demand for oil,” Ed Morse, the head of commodities research at Citigroup Inc., said. “On the other hand, it should take off whatever risk there might be in the market for the moment in terms of additional sanctions.”
Citigroup hence believes the Geneva deal should cut global oil prices by $13 over time, enough to depress Brent crude below $100 and US crude below $85.
Goldman Sachs and Bank of America have both warned over recent days that crude prices will slide in 2014.
It would be difficult for Iran to revive its oil output to former levels quickly even if international restrictions on its exports are lifted, International Energy Agency (IEA) head Maria van der Hoeven said last Monday.
Yet several clauses – including the suspension of associated insurance and services on Iran oil sales –are expected to have some impact on the oil markets. Washington’s pledge not to pursue deeper cuts to Iran’s exports over the next six months and the prospect of some shipments getting EU insurance coverage comes as a welcome and rare immediate relief for Iran’s oil exports. In addition to having to reduce their purchases to get waivers from US sanctions, Iran’s big oil customers have been putting off importing even permitted volumes because they were unable to access the competitive shipping insurance market dominated by European companies.
Kevin Book, Managing Director at ClearView Energy Partners in Washington, said the apparent easing on insurance could provide for an increase of 200,000 to 400,000 bpd in Iranian exports, particularly to Indian refiners.
And that is becoming apparent with each passing day. India could buy more crude from Iran in the next four months. Delhi is already planning to increase purchases further in the next fiscal year. It intends to buy up to an average 220,000 barrels per day (bpd) of oil from Iran in the year ending March 31, Indian Oil Secretary Vivek Rae said on Wednesday.
One Indian state-run refiner, Hindustan Petroleum Corp Ltd. has already said it is ready to look at buying more Iranian oil now that some of the constraints on refinery insurance have been lifted.
However, analysts such as Christopher Helman are of the view that the deal has the potential to derail the US shale boom.
In the short term, the Iran deal will ease the political risk premium baked into oil prices. In the medium term a comprehensive deal could add 1 million or more barrels per day to the market. In the long-term a gush of Iranian oil could soften oil prices enough to kill the economics of America’s tight oil boom.
Can the US afford it? Interesting indeed!