Iran's nuclear deal and how it could affect oil
As a crucial deadline in talks between the West and Iran about its nuclear program looms, analysts warned that a successful deal could further compound the glut in global oil markets.
Representatives from the U.S., U.K., France, Germany, Russia and China met once again Monday with Iranian officials at the luxury Beau-Rivage Palace hotel in Lausanne, Switzerland. Just the hint of a possible deal weighed on oil markets, with West Texas Intermediate (WTI) futures (New York Mercantile Exchange: @CL.1) falling 1.6 percent to 48.08 a barrel by 9:00 a.m. London time, and Brent crude (Intercontinental Exchange Europe: @LCO.1) futures falling to $55.93 a barrel.
Here, CNBC highlights the key points surrounding a potential accord with Iran and how this could affect a commodity that has seen a dramatic fall since mid-June last year.
The negotiations are the culmination of a 12-year standoff between the United Nations Security Council and the Middle Eastern nation. Sanctions were imposed on Iran in 2006 for its failure to halt is uranium enrichment following claims that it was trying to build a nuclear weapon. The country has repeatedly denied such claims, however, and is now seeking an end to the penalties, which have blocked the import and export of sensitive nuclear materials and frozen the assets of people involved with the program.
Meanwhile, global powers are trying to achieve a peaceful resolution which prevents Iran from building nuclear weapons and curbs it uranium enrichment, but also allows it back into the international community and relaxes the sanctions.
With a deadline on Tuesday, March 31, negotiations are already at a key stage and are likely to continue into the eleventh hour. However, with so many potential stumbling blocks, many analysts are saying the chances of a successful accord are too close to call.
Michael Wittner, global head of oil research at Societe Generale, was a little more optimistic, however. In a research note Monday, he said there was a 70 percent chance of success. Seth Kleinman, global head of energy strategy at Citi, also said Monday that the likelihood of a comprehensive deal being done had "risen significantly."
Oil has already fallen in anticipation of an accord , but is expected to see a "knee-jerk" drop of around $5 if agreement is eventually reached, according to SocGen's Wittner.
However, it is not clear how long a move lower would last. Citi's Kleinman agreed that there could be a "short-term bearish jolt to the market."
In terms of supply, nothing concrete would happen until a final agreement is signed at the end of June at the earliest. If sanctions were lifted on that date, 30 million barrels of crude from Iran could flood an already oversaturated market, according to Wittner.
Added to that, Iran - a member of the Organization of the Petroleum Exporting Countries (OPEC) - has previously stated that it could raise its exports by 1 million barrels a day if penalties were removed.
"The bottom line is that, aside from market psychology, we believe that Iranian crude will not become a major issue for the oil markets, from a fundamental perspective, until late 2015 or, more likely, 2016," Wittner said in his note.
A range of potential pitfalls have emerged over the weekend that still need to be ironed out.
One is whether or not Iran will ship its atomic fuel out of the country, most likely to stockpile in Russia. Other concerns include how fast Iran's sanctions will be lifted, how much uranium it will be allowed to produce, what nuclear research and development it will undertake in the latter stages of the accord and how transparent it will be with inspections.
There's also differences of opinion on how long the deal should last, with reports of an agreement spanning 10 years to 15 years on the negotiating table.
Israel. The country sees a nuclear-armed Iran as a key threat for its security, despite Iran denying that it wants to use the uranium in weapons.
Israeli Prime Minister, Benjamin Netanyahu, warned over the weekend that the potential deal looked worse than Jerusalem feared, and Defense Minister, Moshe Ya'alon, said it would be "nothing less than a tragedy for the moderate regimes in the Middle East and the entire Western world," according to The Times of Israel.
U.S. Republicans sympathetic to the Israeli view have also expressed concerns. Congress could weigh in on a possible agreement with a bill demanding its approval, but President Barack Obama has already warned that he could veto any such proposal.
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