Oil prices are likely to drop when futures trading re-opens Sunday
evening, analysts say, as the nuclear accord between Iran and six world
powers potentially paves the way for more crude oil to reach the global
market.
Under the deal, reached Sunday, Iran will stop all production of
near-weapons grade nuclear fuel and allow the removal of Tehran's
stockpile of the fissile material, estimated to be nearly enough to
produce one nuclear bomb. In exchange, Western powers will ease economic
sanctions that U.S. officials estimate will provide between $6 billion
and $7 billion in foreign exchange for Tehran over the next six months.
"The knee jerk reaction will be a move lower in both Brent and [U.S. oil
prices]," said Carl Larry, president of Oil Outlooks & Opinions
LLC.
Brent futures ended Friday at $111.05 a barrel, the highest since Oct.
11, in part because a deal with Iran looked remote at the time the
market closed. Concerns over Libya's ability to export oil on deepening
labor unrest also drove prices higher for the international benchmark.
U.S. oil prices haven't risen as much, as production from shale oil and
Canadian oil sands are keeping the domestic market supplied. On Friday,
oil futures prices on the New York Mercantile Exchange, the U.S. benchmark, ended at $94.84 a barrel.
The breakthrough agreement defuses international tensions over Iran's
nuclear program and would likely send oil prices lower. Iran's oil
reserves are among the world's largest, though its exports have dropped
off as the U.S. and Europe tightened sanctions.
"There's about a million barrels of oil a day that could be very quickly
returned to the global market," said Jason Schenker, economist and
president at Prestige Economics, LLC.
Iran exported 1.5 million barrels a day in 2012, down from 2.5 million
barrels a day in 2011, according to the Energy Information
Administration.
As part of the historic accord, the EU suspended shipping and oil
insurance sanctions on Iran. This puts in place the financial
infrastructure necessary to sell more oil to the market, even though the
embargo on purchasing Iranian oil remains in place for EU members, Mr.
Schenker said.
In the past, certain developing economies in Asia, who were allowed to
buy Iranian oil, would have had to self-insure the cargo, taking on
additional risk. Lifting the restrictions on insurance could allow those
legal sales of crude oil to increase, Mr. Schenker said.
"This would allow non-EU countries to potentially buy greater volumes of Iranian crude," he said.
Investors and analysts say the possibility that Iran's remaining exports
are cut off, or that a conflict with Iran disrupts Middle Eastern oil
production, keeps the price of crude anywhere from $5 to $10 a barrel
higher than it would be otherwise.
To be sure, Iran's membership in the Organization of the Petroleum
Exporting Countries could mitigate any impact on the global energy
market because any increase in Iran's output could be met with supply
cuts from Saudi Arabia or other members of the group.
"If they bring any production back to the market the rest of the
countries will have to adjust their production lower to keep everything
in balance," said Mr. Larry.culled, wall street journal
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