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Why Iran nuke deal collapse not to dramatically affect oil market?

15 May 2018 [12:44] - TODAY.AZ
By Leman Zeynalova - Trend

The re-imposition of US sanctions on Iran is unlikely to have a major impact on global oil supply, a UK-based Capital Economics consulting company said in its analysis.

However, according to the analysis obtained by Trend, geopolitical tensions have intensified and if Iran decides to pull out of the nuclear deal, the impact on oil supply could be more severe.

As such, prices are likely to remain elevated for the next few months at least, said the consulting company.

To recap, oil prices rose by 3 percent after Donald Trump announced that he will pull the US out of the nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA).

The US will re-impose the nuclear-related sanctions on Iran’s economy and oil exports, which were waived under the JCPOA. Whilst the sanctions are effective immediately, there is a wind-down period of 90- or 180-days to allow firms to exit any existing agreements they have with Iran. Trump has also hinted that he might impose additional sanctions on top of those which were waived.

"The last round of sanctions, which were imposed in 2012, caused Iran’s oil production to fall by about 1 million barrels per day. What’s more, oil prices spiked by about 15 percent per barrel, although they quickly fell back. However, the effect on oil supply and prices may not be as dramatic this time for three key reasons," said the analysis.

The experts of Capital Economics believe that first, for now at least, Tehran has decided to stay in the deal and refrain from jump starting its nuclear program.

"Indeed, the Iranian President, Hassan Rouhani, stated that he would wait to see how other countries reacted before taking any action. As long as Iran abides by its side of the JCPOA, the EU might not re-impose its sanctions on shipping insurance which were crucial in disrupting Iran’s oil exports last time. As such, Iran could still be able to export oil to countries less concerned about US sanctions," said the analysis.

The consulting company believes that admittedly, the prospect of secondary sanctions may deter other countries from importing Iranian crude.

"But there are rumours that the EU might take action to shield its firms and other countries are likely to receive exemptions from the sanctions. Indeed, it would not be the first time that the Trump administration has shown a willingness to back down on its threats in return for relatively modest concessions," the analysis reads.

Second, the experts believe that OPEC has plenty of spare capacity which it can use to offset any reduction in supply from Iran.

"The group has cut its production by about 1.6 million barrels per day since the end of 2016, with about half of the reduction coming from Saudi Arabia. Riyadh has already pledged to step in and limit the impact of any disruption to Iranian supply. Third, higher oil prices will encourage more non-OPEC production, especially from the US where shale producers tend to be very responsive to prices," Capital Economics said.

The overall impact on oil supply and prices will depend on whether Iran stays in the deal and how severe the secondary sanctions are, the consulting company said in its analysis.

"At the very least, there is likely to be a higher risk premium in oil prices for the next few months. However, for now, we expect the impact on supply to be relatively small and so are sticking with our end-2018 forecast of $65 per barrel, down from about $77 today," said the experts.

URL: http://www.today.az/news/regions/170032.html

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