In this week’s post I’m going to talk about the implications of the framework Iran nuclear deal. For those of you who haven’t been following the news, last Iran and world leaders agreed to a framework of a finalized compromise on Iran’s nuclear program. The deadline for this final deal is currently June 30th, but reaching the framework is incredibly significant on the world’s oil supply and hence the price.
Iran currently has been under heavy UN sanctions due to continuing to develop their nuclear program despite resistance from most of the world. As a result of this a major sanction was to severely limit the countries crude exports. This resulted in 1 million barrels of oil a day being removed from the world economy. As we know from econ, decrease in supply means increase in prices. However, these sanctions have been on the country for quite some time, therefore this decrease has been priced in since before oil even began to drop last year.
This moves us to the present. Due to the framework of the deal being reached, it’s generally expected that a full deal will be reached at some point around the deadline (Most likely a month later, because Iran get’s a weird twisted joy out of standoff negotiations). This means that the sanctions will be lifted, and there are two major ways that these sanctions will be removed.
SCENARIO 1: Sanctions are removed in a short time-span
The first scenario for the removal of these sanctions would be that the sanctions are lifted in a relatively short time span, virtually all at once. This means that after about a one month ramp up of production by Iran, they would be producing at virtually full capacity again. The impact of Iran’s production is around 1 million barrels of oil a day at full production capabilities. That seems relatively insignificant until you realize that OPEC as a whole produces 30 million barrels of oil a day. This means that Iran’s entrance to the market would increase the overall supply by >1%. This would be a massive market shock, and we would see the price of oil drop like a rock in response. To put the impact of the actual re-entry into perspective, oil dropped 6% when the deal, with zero specifics, was SIMPLY ANNOUNCED. Imagine the reaction on a release of full removal of sanctions/reentry into the market.
SCENARIO 2: Sanctions are removed gradually over a year+
This second scenario basically have the sanctions being removed in phases over a relatively long period. In this situation the market shock would be relatively minute, but it would ultimately result in the price of oil stabilizing around 50, where it is now, despite economic growth around the globe. In this scenario, oil would once again be projected to stay low for even longer than it already is. Most growth in demand increasing price across world economies over the next year would pretty much be canceled out by this development.
The real question is which one is to be expected? Thankfully Iran informed us that the sanctions would be lifted IMMEDIATELY… Until the US then came out the next day and said the sanctions would be lifted IN PHASES. Who doesn’t love global politics?
Well, I have to say, if Bibi has anything to do with it, the sanctions won’t come down all at once. However, I have a funny feeling that other leaders might overpower him with the global economic scene in mind. Personally I still don’t trust Iran, but if they’re contributing that much to the global economy, we almost have to give them a shot, don’t we? The next few months could be quite interesting…
Should be interesting to see where this whole thing goes. Hope Iran doesn’t start selling nuclear waste for “reprocessing” along with its oil.
I had been following the news and had heard of the Iran negotiations (okay, I lied, “the news” was actually Jon Stewart). But still, I had never considered the economic implications in the oil behind these talks with Iran. I like how you set out the two different scenarios to explain what would result from either way the sanctions are lifted, as it helps to paint a more clear picture in my mind. Nice post, and yes, politics, as well as global politics, just suck in general.