After months of off-and-on again deliberations, President Obama agreed late Saturday night to ease sanctions against Iran in exchange for a curtailment of some of its nuclear activities. The announcement came as a surprise to most market watchers who were expecting to hear the news following the end of the summit meeting between Washington, Teheran and other world powers last Thursday.
The agreement, which ended a ten-year deadlock, was reached after lengthy Geneva talks between Iran and the U.S., Britain, France, Russia, China and Germany. It stipulates a 5 per cent limit to Iran’s uranium enrichment, far below the level needed for nuclear weapons and a cessation of 20 per cent enrichment for six months.
Embargo Continues
While sanctions were reduced on auto parts, gold and precious metals, the embargo remains in place on all of Iran’s oil exports till a longer lasting solution emerges that will guarantee the country does not employ any nuclear technology for non-peaceful purposes.
Market response to the Iran nuclear talks was immediate. As global oil markets welcomed news of the interim deal, the benchmark Brent crude oil price slipped more than 3 per cent. Oil traders are betting that a longer-term deal could restore Iran's oil production to pre-sanctions levels, which could mean an additional million barrels per day on world markets. Should Iranian oil indeed return to international markets, the additional supply is likely to make crude less expensive.
Analysts are warning, however, that should negotiations end up collapsing, it could cause a dramatic spike in oil prices because the risk that Iran would carry out an earlier threat to blockade the crucial oil shipping route in the Strait of Hormuz will increase. Many analysts are skeptical about whether Iran can truly be trusted. They feel that the price drop was a knee-jerk market reaction to the interim Iran nuclear deal and that the pact will not be long lasting.
4th Largest Oil Reserves
According to the International Energy Agency, Iran holds the world’s fourth-largest proven oil reserves and second-largest natural gas reserves. Iranian oil exports have plummeted by 60 percent in the past two years as a result of the international sanctions. The sanctions have crippled Iran’s economy, which relies on crude oil sales for 80 percent of its export earnings.
As part of the Iran nuclear talks, Iran’s oil sales are not supposed to increase and the United States has the ability to pressure other nations to limit how much Iranian crude they can buy.
Until now, the U.S. has been putting pressure on other nations to cut back their purchases of Iranian oil. The White House is changing its position as a result of the deal and is allowing Iran to keep about a million barrels a day in sales, which was Iran’s average the first nine months of this year and accounts for 285,000 barrels a day more than Iran exported in October.
Some analysts believe that the volume of Iranian crude oil available to the international market will largely remain unchanged over at least the next six months. Although it will not put Iran back on top of the world’s oil reserves, it would certainly put the brakes on the downward movement suffered by oil exports over the last few years.