News and Views

Oil price falls after Iran deal

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Iran deal pushes global stocks to hit their highest level since 2008. Brent crude oil falls as much as $3 per barrel on Monday to $108.05 on Monday morning following historic agreement between Iran and the West.

 

Brent crude oil fell as much as $3 per barrel on Monday morning after a historic agreement between Iran and the West eased oil supply worries.

The deal, struck between the so-called P5+1 – the five permanent members of the UN Security Council plus Germany – and Iran, curbs the Middle Eastern regime's nuclear enrichment activities in return for a partial lifting of trade sanctions for a six-month period.

It prevents Iran from enriching uranium to weapons-grade level and is designed to increase the amount of time that Iran would need to "breakout" and build a nuclear weapon.

In return, the P5+1 will ease sanctions in what the White House has described as a “limited, temporary, targeted, and reversible” manner to the tune of around $7bn. Around $4.2bn of this will relate to oil sales.

Brent dipped as low as $108.05 after falling $3 from Friday's close. It has since recovered some of its earlier losses to trade at around $109.29.

However, analysts warned that any downward movement in oil prices could be "short lived".

"Events in the horizon have the potential to lift prices swiftly again," said Barclays analysts in a note to clients, citing the December 4 OPEC meeting, where discussions could centre on management of the group's production quota.

They also warned that the political situation in the region remains fragile, and that any escalation of a nuclear arms race in Iran's neighbouring nations could "swiftly reverse the current softness in Brent prices."

Tough sanctions against Iran in the past two years have slashed exports from the OPEC member by more than half and cost Tehran billions of dollars in revenue losses a month, keeping Brent above $100 a barrel despite weak global demand.

Apart from the revenue loss from reduced oil exports, Iran has billions of dollars stuck in banks in countries which buy its oil because the sanctions have cut off transfer facilities.

The White House estimates that Iran has lost more than $80bn since the beginning of 2012 because of lost oil sales. It also estimates Tehran's earnings over the next six months will be $30bn down compared with a six-month period of 2011, before sanctions were imposed.

The head of the International Energy Agency said on Monday it would be difficult for Iran to revive its oil output to former levels quickly even if international restrictions on its exports are lifted.

But an easing of the ban on European shipping insurance may help smooth Iran's crude exports to its big Asian customers.

Oil prices may however find a floor as sanctions that prevent energy companies from investing in Iran, and have slashed its oil exports to around 1 million barrels per day (bpd) from 2.5 million bpd, remain in place.

Lower oil shipments from Libya – which remain disrupted by protesters seizing shipping ports and have been running at a fraction of the levels seen earlier this year of more than 1 million bpd – will also underpin prices.

"Those sorts of steps, at the margins, do make it more attractive, or at least less problematic to ship Iranian crude. It opens a chink in stopping Iranian crude getting out," said Deutsche Bank's global head of commodity research Michael Lewis.

Still, the weekend's agreement is only the first stage of fraught negotiations. Iran and the P5+1 have yet to thrash out a final accord.

Israeli Prime Minister Benjamin Netanyahu denounced the deal as a "historic mistake." US President Barack Obama also has to sell the accord to sceptics in Congress, including some in his own Democratic Party, who have been pressing for more sanctions on Iran.

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