Oil Slump Seen as ‘Knee-Jerk’ Reaction to Iran Deal

Photographer: Behrouz Mehri/AFP via Getty Images

Iran agreed yesterday to curtail its nuclear activities in return for easing of some sanctions on oil, auto parts, gold and precious metals. Close

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Photographer: Behrouz Mehri/AFP via Getty Images

Iran agreed yesterday to curtail its nuclear activities in return for easing of some sanctions on oil, auto parts, gold and precious metals.

Iran’s pledge to restrict nuclear work in return for loosened economic sanctions may have a limited effect on crude prices, said analysts who called today’s 2.7 percent slump in Brent a “knee-jerk” reaction.

Oil exports from the Islamic republic will be held to about 1 million barrels a day under sanctions that remain in force after Iran and six world powers reached an agreement yesterday in Geneva, according to the White House. Brent crude prices slumped today in the first day of trading since the deal while West Texas Intermediate also fell in New York.

“The move lower in prices is an expected reaction, especially considering the recent strength in prices,” said Mark Keenan, head of commodities research for Asia at Societe Generale SA in Singapore. “But to see a more significant move lower in prices, the market will likely require a little more evidence that this initial resolution goes through.”

The six-month agreement, which offers Iran about $7 billion in relief from sanctions in exchange for curbs on its nuclear program, leaves in place banking and financial measures that have hampered the OPEC member’s crude exports. Sanctions on sales of refined products also remain, while Iran gains access to $4.2 billion in oil revenue frozen in foreign banks, the White House said.

The sanctions have cut Iranian crude sales by 60 percent since the start of 2012, depriving the country of more than $80 billion in revenue, U.S. President Barack Obama’s administration said in a statement announcing the deal yesterday.

EU Embargo

Buyers of Iranian crude that have reduced purchases won’t be required to make further cuts over the next six months under yesterday’s accord. As part of the deal, the European Union will lift a ban on insurance for tankers transporting Iranian oil, making it easier for the Persian Gulf nation’s six remaining international customers to take delivery. The EU will continue to prohibit crude imports from Iran.

“There will be a little bit of a knee-jerk reaction,” Jonathan Barratt, the chief executive officer of Barratt’s Bulletin in Sydney, said in a Bloomberg television interview. “The deal being put through is on a trial basis.”

Brent crude, a benchmark for more than half the world’s oil, lost as much as $3 a barrel to $108.05. Prices ended down 5 cents at $111. WTI fell 75 cents to close at $94.09 a barrel on the New York Mercantile Exchange.

Temporary Drift

“The downward drift in prices in reaction to the announcement of the interim deal could be short lived,” Barclays Plc analysts Helima Croft, Miswin Mahesh and Michael Cohen said in a note on the Iran agreement today. “Iran will be challenged to drastically increase its oil exports because of the remaining sanctions and technical challenges restarting shut-in production,” Barclays said in the e-mailed report.

Futures in New York have slumped 13 percent since Iranian President Hassan Rouhani took office Aug. 1, pledging to end the sanctions crippling his country’s economy. Losses in Brent crude were limited to 0.4 percent over the same period as exports from Libya slumped amid unrest in the North African country.

The accord may put “downward pressure” on Brent prices because it will let Iran raise exports by nearly 300,000 barrels a day from last month’s level, said Olivier Jakob, managing director of consultant Petromatrix GmbH.

Iranian Sales

Imports from Iran fell to 715,000 barrels a day in October, compared with 1.26 million in the previous month, the International Energy Agency said in a Nov. 14 market report. Shipments from the country still averaged 1.1 million barrels a day in the first nine months of this year, according to the agency.

The combined effects of oil, shipping and financial restrictions caused buyers of Iranian crude to take less than sanctions allowed, Jakob said by phone from Zug, Switzerland, yesterday. By loosening sanctions on insurance, the agreement will enable importers to buy their full allotments, he said.

“For the next six months, we know we will have the maximum exports from Iran that are allowed by sanctions,” Jakob said. “Now the big supply uncertainty is Libya.”

Goldman, Barclays

Analysts at Goldman Sachs Group Inc. said in a note published today that Iranian crude exports would remain largely unchanged over the next six months, compared with the nine-month average so far this year. Barclays said any incremental Iranian exports were unlikely to exceed 400,000 barrels a day over the span of the agreement. Reaching a final deal leading to removal of the most significant sanctions “remains challenging,” Barclays said.

Yesterday’s agreement offers what Obama called targeted relief from sanctions, all of which can be imposed again if Iran doesn’t stick with its end of the bargain. It is intended as a first step to a comprehensive accord to be reached in six months to constrain Iran’s nuclear activities so that it can’t be used to make an atomic weapon, in exchange for a planned lifting of nuclear-related sanctions. “Iran’s crude oil sales cannot increase” over that period, the White House said.

“It’s a step, but it’s not like the end of a sanctions regime, not like it’s going to have a significant impact on the real balances of supply and demand for oil,” Ed Morse, the New York-based head of commodities research at Citigroup Inc., said in a phone interview. “On the other hand, it should take off whatever risk there might be in the market for the moment in terms of additional sanctions.”

$1.5 Billion

The accord allows Iran limited petrochemical exports and removes some curbs on gold trading. Those measures, together with an easing of sanctions on the automotive industry, will potentially provide Iran with $1.5 billion in revenue, the U.S. administration said. The accord also eases constraints on safety-related repairs for some Iranian airlines.

The EU’s removal of a ban on insuring tankers transporting Iran’s crude will ease exports to India, refinery officials in that country said yesterday. Indian Oil Corp. (IOCL), Hindustan Petroleum Corp. and Mangalore Refinery & Petrochemicals Ltd. (MRPL) will be able to purchase contracted volumes more easily, officials from the companies said, adding that they don’t intend to buy more oil than previously planned.

In June 2012, there were 23 importers of Iranian crude; today, only six remain - China, India, South Korea, Japan, Turkey and Taiwan, according to U.S. officials. Iran is the sixth-biggest producer in the Organization of Petroleum Exporting Countries, down from the second-place rank it held until last year.

Brent Forecast

The nation’s crude exports fell to a 21-month low in October while the volume of Iran’s unsold oil stored in tankers rose to about 37 million barrels, the IEA estimated. The country’s crude production averaged 2.6 million barrels a day last month, according to data compiled by Bloomberg.

The European grade may slip below $100 a barrel for the first time since June should talks lead to the easing of sanctions, according to a Bloomberg News survey of traders and analysts on Oct. 14. Brent may drop by $12 a barrel, according to the mean estimate of 19 traders and analysts surveyed by Bloomberg. Prices rose to as high as $128.40 in March 2012 as the U.S. and EU tightened sanctions.

“There’s still a long way to go but with each of these steps we should see some sort of response to the risk premium,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The bigger thing for the oil market in terms of the impact on prices is the longer view that this represents a tangible step toward a more final solution that might ultimately see the sanctions lifted altogether.”

To contact the reporters on this story: Ramsey Al-Rikabi in Singapore at ralrikabi@bloomberg.net; Anthony DiPaola in Dubai at adipaola@bloomberg.net; Indira A.R. Lakshmanan in Geneva at ilakshmanan@bloomberg.net

To contact the editors responsible for this story: Stephen Voss at sev@bloomberg.net; Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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