Iranian deal to have limited impact on oil market

A six-month agreement has been made in Geneva between Western powers and Iran, under which Iran has agreed to curb some of its nuclear activities in return for about $7bn (£4.3bn) in sanctions relief. As part of the agreement, Iran has reportedly agreed to stop enriching uranium beyond 5%, and to ‘neutralise’ its stockpile of uranium enriched beyond this point. It will also provide greater access to inspectors, including daily access at the Natanz and Fordo nuclear sites, and there will be no further development of the Arak plant which is believed to be capable of producing plutonium. In return, there will be no new nuclear-related sanctions implemented for a six-month period if Iran sticks by the accord and Iran will also receive sanctions relief worth about $7bn (£4.3bn).

While the deal will help lower geopolitical tensions across the Middle East region, it is expected to have a limited effect on the short-term oil market as many of the major restrictions on oil exports under the European Union’s (EU) oil embargo remain in place. These include restrictions on sales of refined petroleum products to Iran and against long-term investments in Iran’s energy sector. The deal also holds Iran’s crude exports at the current level of 1mn b/d, significantly lower than the pre-sanctions level of 2.5mn b/d.

However, the lifting of EU sanctions on providing Iranian oil carriers with insurance and reinsurance ‘will make it easier for buyers to purchase Iranian crude’, notes market analyst Douglas-Westwood. ‘They can now access insurance for shipping cargoes, meaning the 37mn barrels of oil loaded in Iranian tankers stranded at sea may now more easily be absorbed by the market. Meanwhile, Asian importers are now more likely to maintain Iranian import levels as sanction waivers become easier to obtain.’

The real impact of Iran’s potential return to the market will only become clear in six month’s time if the current agreement is extended to allow no limit on export sales. At such a time, the Iranian oil industry will have substantial work to do in order to ramp up to pre-sanction levels, which may open up a number of opportunities for the international oilfield services sector.