Complex Made Simple

Open for business? Iran, world powers agree on nuclear deal

Oil prices are seeing a downward trend as the Iranian nuclear deal was signed this morning. Media reports suggest that the historic deal between Iran and the P5+1 (China, France, Russia, the United Kingdom and the United States, plus Germany) was signed in Vienna after months of tough discussions.

Bloomberg said: “Iran and world powers sealed a historic accord to curb the Islamic Republic’s nuclear programme in return for the lifting of sanctions. Diplomats reached an agreement in Vienna, according to an official involved in the talks, who asked not to be identified and didn’t elaborate on the details of the deal.”

“The accord will curb the nation’s nuclear programme in return for an easing of sanctions that have crippled the Islamic Republic’s economy. It promises to end a 12-year standoff over Iran’s nuclear activities that has at times drawn threats of military action from the US as well as from Israel, which has indicated it will lobby American lawmakers to reject the deal,” added the news agency.

Iranian officials earlier stated that, if a nuclear accord is reached and sanctions are lifted, Iran can double its oil exports in the next six months by producing one million barrels per day.

Sarosh Zaiwalla, the international sanctions lawyer who is fighting sanctions on behalf of Iranian oil companies, says: “Sanctions have crippled Iran’s oil production, halving oil exports and severely limiting new development projects. The prospect of them being lifted is creating great excitement within the industry, as foreign trade and investment will allow Iran to make huge efficiencies and drive down the cost of production.”

“With a nuclear deal imminent, it is clear that Iran is preparing to make up lost ground and re-establish itself as a major supplier,” Zaiwalla adds.

Last Friday, the International Energy Agency expressed its concern over the huge oversupply in the global oil market and stated that “the bottom of the market may still be ahead the market’s ability to absorb that oversupply is unlikely to last.”

Reuters quoted analysts as saying that it would take Iran many months to fully ramp up its oil export capacity following any easing of economic sanctions on Tehran. But even a modest initial increase could be enough to pull international oil prices down further, as the market is already producing around 2.5 million barrels per day above demand. The downward trend in oil prices continues, as Brent crude for August fell $1.89 to a low of $56.84 a barrel before rallying back to around $57.42 by 1500 GMT. US light crude, also known as West Texas Intermediate (WTI), was down 60 cents at $52.14 a barrel.

With such pressure on oil prices, the hydrocarbon-rich countries in the Arab world are likely to suffer the most as the income from crude oil exports contribute to most of the governments’ spending. On a positive note, the removal of trade and banking sanctions could benefit Dubai, a traditional centre for trade with and investment in Iran; it would also benefit Gulf logistics and transport companies, says Reuters. “But excluding Dubai, most economies in the region have little exposure to Iran, so a nuclear deal’s impact on oil prices might overshadow, at least initially, any other factors.”

This article was first published on TRENDS Online, a sister title of Aficionado.