How an Iran nuclear deal would impact oil prices

27 Jun 2015 | Author: | No comments yet »

At the open: TSX tracks global stocks retreat.

Oil prices rose over the week despite the crude market facing pressure from high supplies, as traders awaited deals over Greece’s bailout and Iran’s nuclear program. After crashing last year and then hitting several peaks and valleys, oil prices have traded within a relatively narrow range, with WTI bouncing around a bit above and below the $60 per barrel mark, and Brent staying near $64 per barrel.

LONDON: Oil prices slipped on Friday but remained stuck in tight trading ranges as investors awaited the outcome of Iranian nuclear talks which could lead to a big increase in Iranian crude exports.Oil extended losses below $60 US a barrel as near-record American production prolonged an oversupply amid the lowest trading volatility in eight months.Canada’s main stock index opened lower on Friday, tracking global markets, as last-ditch talk efforts between Greece and its creditors dominated investor focus, while lower crude prices weighed on energy stocks.The Toronto Stock Exchange’s S&P/TSX composite index fell 41.1 points, or 0.28 per cent, to 14,856.40. OIL: The weekly US industry report showed domestic output remained high and commercial fuel inventories at generous levels in the world’s biggest consumer of crude.

A Greek default would be likely to strengthen the dollar against the euro, providing headwinds for oil and other commodities priced in dollars, economists say. Crude investors were weighing the “potential negative impact from Greece’s debt crisis on European energy demand,” Singapore’s United Overseas Bank said in a market commentary. U.S. crude stockpiles remained 84 million barrels above the five-year average for this time of the year while the nation pumped near the fastest pace in more than three decades of weekly government data. Dealers are also keeping a close watch as Iran and major Western powers race to agree a deal also by Tuesday that would see Tehran open up its nuclear program to allay concerns it is seeking atomic weapons, in return for the West lifting punishing economic sanctions.

But the deadline for the Iran negotiations – ostensibly set for June 30 – is only a week away and the outcome could have broad ramifications for the oil market, both in the immediate aftermath and over the long-term. (Related: Shale Resources Key To Deciding Argentina’s Future) If a deal can be agreed to by both sides, Iran could bring a wave of oil production online. However, efforts to finalize the historic nuclear deal with Iran remain stuck on several issues, diplomats from both sides said on Friday, as US Secretary of State John Kerry headed to Vienna for weekend talks. The possibility that Iran may strike a deal with Western powers to end economic sanctions has been capping gains in oil, as a resumption of Iranian crude exports would exacerbate a global over-supply.

The Organization of Petroleum Exporting Countries has pumped more than its quota of 30 million barrels a day for the past 12 months as the group seeks to defend market share against higher-cost producers. “We are still pumping at a near-record level and production hasn’t been affected by the rig count yet,” said Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut. “The longs are waiting for something to drive prices higher but they don’t have the correct fundamental picture.” WTI for August delivery slipped 7 cents to settle at $59.63 a barrel on the New York Mercantile Exchange. By Friday on London’s Intercontinental Exchange, Brent North Sea crude for delivery in August climbed to US$63.25 a barrel from US$62.66 a week earlier for the expired July contract. Also, Iran has somewhere around 40 million barrels of oil sitting in storage, a lot of which could essentially hit the market as soon as sanctions are lifted. (Related: Petrobras May Be Selling But Is Anyone Buying?) If news breaks that a deal is in hand, oil prices will sink on the expectation of this future volume, potentially dropping by $5 to $10 per barrel.

Of course, supply and demand will have to balance out over time, and more Iranian crude will force a larger adjustment from U.S. shale, so U.S. oil production could see a deeper contraction. Three-month aluminum rose to US$1,709.50 a tonne from US$1,690.50, while three-month lead edged down to US$1,787 a tonne from US$1,792 and three-month tin decreased to US$14,865 a tonne from US$15,210. OPEC’s share of the global market last year shrank to 41.8 per cent, the smallest since 2003, underscoring its motive to defend sales by maintaining supply. If one of the strongest opponents to negotiations with Iran is starting to come to terms with the inevitability of an agreement, that is pretty strong evidence that a final agreement could be in the works. Supreme Leader Ayatollah Ali Khamenei said this week that economic, financial and banking sanctions must be lifted immediately after an accord with world powers, as talks approached a June 30 deadline.

Khamenei laid out some of Iran’s “red lines” for negotiations in a TV broadcast on June 23, several conditions that appear out of step with U.S. demands. Inspections of military sites and restrictions on the nuclear program aren’t acceptable, he told senior government and military officials, according to the Islamic Republic News Agency.

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