How the New Iranian Nuclear Deal Will Impact Oil
This week, reports emerged that a draft deal on Iran’s nuclear program would be reviewed by the Western negotiators. Crude oil prices plummeted – West Texas Intermediate (WTI) closed down 4.2%, at $56.96 a barrel, the lowest since April 22.
The concern spurring the decline is that an agreement would lift the Western sanctions and allow Iranian oil to flood into the market, propelling prices down.
But there’s only one problem.
There was no genuine truth to the rumor, as confirmed by actual negotiation participants last evening.
Now, I am not somebody who falls into line with each conspiracy theory on market machinations that comes down the pike. But this sequence of events was tailor-made for one.
So let’s set the record straight on the negotiations.
How the Shorts Will Profit
The market will be light on volume today, closed tomorrow and over the weekend, and subject to the phased-in activity resulting from a long holiday weekend on Monday.
This July 4 weekend just happens to be perfect for running what we used to call a “narrow-cover short.” As with all shorts, the intention is to profit if a price (or value) declines. However, this particular version is meant to last no more than five trading sessions.
Such shorts usually target narrower returns, betting on a quick push down that is not sustainable, given overall market dynamics… like a well-placed if mistaken (and I’m giving the benefit of the doubt here) “news” release.
By that time, the global market is on the other side of a hastily called (as well as procedurally suspect) referendum in Greece, and other matters will take over. The “super short” shorts will be covered, and a few folks will pocket some nice change.
In Iran, Nothing Is Changing
The deadline for the Iranian deal was technically June 30. Both sides have continued talking (seriously so, according to some sources), but the prospects of a deal are quite unknown. Remember, whatever accord U.S. Secretary of State John Kerry brings back from Switzerland is likely to have a nasty fate in a hostile Republican-controlled Congress.
The stumbling blocks I discussed several months ago are still present. However, a new roadblock that could derail any prospect of a breakthrough is the recent statement by Iranian Supreme Leader Ayatollah Ali Khamenei categorically rejecting inspector access to a number of the most strategic nuclear locations in the country. Left unresolved, this is enough to table any further development in negotiations.
And then there is what I wrote in Oil & Energy Investor back on March 17 (“The Truth about Iran’s Impact on Oil Prices”). In the attempt to estimate what any accord will mean for oil prices, what I wrote in that piece holds as much today as it did then.
It’s getting to be crunch time in the negotiations between the West and Iran over Tehran’s nuclear program.
Despite an ill-advised attempt by U.S. senators to scuttle the talks, it’s clear the negotiations in Geneva will continue.
Now TV pundits have taken to the airwaves suggesting that an agreement would flood the market with Iranian oil.
Combined with production surpluses in the U.S. and elsewhere, the “instant” prognosticators are pushing their Armageddon pricing scenario again, putting additional pressure on oil prices.
Meanwhile, those playing the new “Iranian card” are shorting oil even further.
It’s just the latest example of a self-fulfilling prophecy.
It works like this…
Chicken Little of “The Sky is Falling Brokerage” hits the airwaves warning of a collapse in prices, only to earn huge off-camera profits based on what he just said.
Meanwhile, average investors are left holding the bag as share prices fall.
There’s only one problem with all of this instant “analysis” and it’s a big one…
The Tricky Business of Dealing With Iran
There is no question that the sanctions designed to limit Iran’s access to global oil sales and finance have had a sobering impact in Tehran.
While oil exports have continued to countries like China and India, the overall effect of the drastic cut in Iranian oil exports has been nothing short of a disaster for the domestic economy.
In addition, given the indirect way in which these exports must be financed – since Iranian access to Western sources of hard currency has been cut – even those consignments that can be sold cost more on both ends, further reducing the effective revenues to Iran and exacerbating the price tag.
For Tehran, therefore, an accord would allow more oil exports to be phased in, offering the realization of badly needed revenues. On the other side of the table, a verifiable move to end a suspected nuclear weapons program (which Iran has always denied) would yield additional regional security, welcomed by the West.
But the truth is that any accord reached in Geneva must overcome a profound amount of mistrust and animosity against the West in general… and the U.S. in particular…
There’s another very important caveat: The “Iranian card” will have no short- or medium-term impact on oil prices.
An Industry in Absolute Shambles
Even assuming that an agreement is forged in Geneva – a very big if, considering the fate of previous attempts – there will need to be a very protracted process set in motion before any sanctions are lifted and even one additional drop of Iranian oil makes it to market.
For one thing, the sanctions have wreaked havoc on Iran’s production potential, which is already derived from the oldest continuously operating oil fields in the Middle East. It will take time to make arrangements for essential replacement parts, refurbishment, engineering, and related matters before any of this production can be ramped up. That won’t happen overnight.
For another, the Iranian shipping and delivery systems related to oil exports are in a shambles. Even aside from contracting for tankers and port availability, the current sanctions apply to both shipping financiers and insurance companies. Unraveling that Gordian knot will take a considerable amount of time and new banking arrangements… even if outside shippers are convinced this trade will be profitable.
Finally, the market share that used to be met by Iranian volume in several global markets (especially in Europe) has since been replaced by other sources given the current surplus supply. What’s more, the price is already depressed well beyond what Iran needs to stay afloat, and further discounting it to compete will merely make matters worse.
Iran is one of those OPEC nations (Venezuela and Nigeria being others) that need oil prices to be well north of $100 a barrel if they have any hopes of balancing their budget. In fact, one estimate has put the need as high as $142 a barrel – almost $90 higher than current prices in London for Brent benchmark crude.
But the biggest reality of all is in the hands of the West. Any accord will take time to finalize.
If that ever occurs, there will certainly be benchmark requirements in place that Iran will have to meet and verify before any oil is exported. So the relaxing of sanctions will occur in stages over time.
Of course, all of these real world truths can’t be explained in a sound bite on TV. So some of the talking heads would rather simplify and distort the issue, since it’s in the best interest of their bank accounts.
What else is new?