There Could Be an Iran Deal This Weekend, But Don’t Expect Oil Prices to Plummet

There Could Be an Iran Deal This Weekend, But Don’t Expect Oil Prices to Plummet

If the West makes a deal this weekend with Iran — one of the world’s largest oil producers — the price of crude will almost certainly fall on Monday.

But after that? Don’t count on it.

"The assumption that a deal was coming had put some downward pressure on oil," said Daniel Sternoff, Director of Energy Research, at Medley Global Advisors. Sternoff said that some people in the market see a deal as an indication that the Iran sanctions could be lifted, bringing Iranian oil back to the market.

Prices of crude have fluctuated this week with the prospects of success in Geneva, where the United States is negotiating with Iran and five other countries about suspending some of the sanctions on the Iranian economy in exchange for Tehran curbing parts of its nuclear program. The price of crude oil fell in the middle of the week, but recovered to over $95 per barrel by Friday. Though oil sanctions aren’t necessarily on the table in Geneva, an interim deal could raise hopes in the market that they’ll be lifted in the future, which could in turn send prices lower.

Yet that view could be optimistic, Sternoff said. "Even under an interim deal, it’s not like we’re going to see a huge rush of Iranian oil back on the market."

At it’s peak, Iran produced close to 4 million barrels of oil per day, but sanctions have reduced that close to 2.5 million barrels per day.

Amy Myers Jaffe, who studies fuel markets at the University of California Davis, said any drop in prices if there’s a deal this weekend wouldn’t necessarily be about "how much extra oil is going to come out from Iran."

Instead, "the real impact is in changing the market psychology and that’s just much harder to predict," said Jaffe, who is the Executive Director of Energy and Sustainability at the University of California at Davis’s business school. Changing that psychology would require not just a deal with the United States, Jaffe added, but improved relations with Saudi Arabia and Israel as well.

"If we start to see a resolution of the way that Iran engages in all these different domains," then that lowers the risk of conflict in Syria, Jaffe said.

Patrick Clawson, Director of Research at the Washington Institute, said a fair amount of this week’s movement in oil prices around the Geneva talks is about the reduction of this "risk" premium, which is the extra amount factored into the price of oil based on the risk of conflict in the area.   

"The risk of there being a conflict that imperils oil shipments from the Persian Gulf goes down and therefore oil prices go down," Clawson said.

Recently, Iranian officials and foreign oil companies, like Chevron, Total, and Royal Dutch Shell, have been talking. Some have taken that as a sign that Iran is willing to give foreign companies better terms than before, when Iran often required companies to enter into agreements with state-controlled companies. A U.S. official said Iran is losing $5 billion a month because of lost oil sales, according to the AP.

"If there’s an accord that will allow foreign companies to come back to Iran, they’re much more likely to be interested," Clawson said.  Though he adds that oil companies have many more choices for investment these days, including in Africa and the United States.

While a broad deal could signal greater stability in the region and therefore reduce the extra "premium," actually increasing the amount of Iranian oil on the market would likely take more time. There are a lot of practical hurdles to Iran increasing output, even if sanctions are lifted.

Kamran Dadkhah, an associate professor at Northeastern University who has studied the Iranian economy, said Iran’s oil industry has been left behind as technology has improved because there’s been no real investment in Iran’s oil fields in decades. For instance, he said, the lack of investment means Iran’s oil wells aren’t well maintained.

"If the sanctions are lifted and investment goes to Iran, in the long run, you will have a very, very positive effect," Dadkhah said.  But, he added, the big caveat is whether Iran sticks to any deal it makes in Geneva.