Oil: Tallying the market impact of US withdrawal from Iran deal

Ned Salter, Head of Research at Fidelity International

The US decision did not come as a surprise and had been priced into oil markets, limiting the their short-term reaction. In the longer term, sanctions are supportive for oil prices.

‘New’ deal

The US has decided to withdraw from the Iran nuclear agreement and reinstate economic sanctions. The US state department has released a fact sheet suggesting sanctions will be gradual and not as immediate as headlines suggest.

The other members of the nuclear deal - the UK, France, Germany, China, Russia-- have not withdrawn and remain supportive of the existing deal, but have also hinted at an improved ‘new’ deal.

For global oil markets, the consensus is a potential supply impact of 300,000 to 500,000 barrels per day, or 0.3 to 0.5 per cent of global supply. Export flows are unlikely to adjust immediately, and Asia could take some or all of the volume subject to refinery capacity, shipping availability and financial settlement.

The calculations are as follows: Since the lifting of sanctions, production in Iran has increased by around one million barrels per day, with crude exports now at about 2.2 million barrels per day (April figures noticeably higher).

Around 60 per cent of the export volume goes to Asia, with China, India, South Korea and Japan being the largest buyers. European buyers take around 25 per cent, and they could stop purchases to avoid US sanctions even if the UK, France and Germany remain signatories.

This might leave about 500,000 barrels per day of displaced volume to be absorbed in non-European markets. Saudi Arabia has also stated it is willing to mitigate the impact of supply shortages caused by new sanctions.

Sanctions will support mid-cycle oil prices

In terms of the oil price, my view is that much of this is reflected in the spot price. By Wednesday 9 May, Brent crude had risen $1 to $77 per barrel following the announcement and was up around $10 per barrel over the last 4 weeks. Most energy specialists had thought a US withdrawal was a near certainty ahead of the event and there is more debate now on other events, such as Venezuelan elections on May 20.

Over the long term, sanctions could slow international investment in Iran’s oil sector and cap its growth outlook beyond 2020. This is ultimately supportive for mid-cycle oil prices, to which equity valuations are anchored.