Nuclear Agency Deal with Iran Cuts Crude Price

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The International Atomic Energy Agency (IAEA) and the government of Iran have agreed to a new inspection plan that gives the IAEA access to previously closed Iranian nuclear development facilities. The agreement was reached yesterday according to a report from Bloomberg News, just two days before a meeting in Baghdad that will include Iran and the so-called ‘P5+1’ — the US, the UK, Russia, China, Germany, and France — with the goal of reaching a negotiated deal on Iran’s nuclear development program that would allow the easing of sanctions on Iran.

Now that Iran has agreed to inspections by the IAEA, an agreement at the Baghdad meeting is far more likely. If the Baghdad meeting results in a further agreement between Iran and the P5+1, crude prices could fall another $5/barrel, perhaps even more. And Iran has plenty of incentive to negotiate this time.

Iran crude shipments are stalled, with an estimated 40 million barrels or so floating around in the Persian Gulf with nowhere to go. Tankers cannot buy insurance, and without insurance the crude stays put. Iran cannot cut production significantly because that could damage the country’s wells, so it continues to produce millions of barrels a day that it cannot sell.

The oil Iran does sell to India and China is paid for in rupees and yuan, neither of which can be spent outside the country of origin. Iran’s estimated unemployment rate approaches 35% and food prices have risen anywhere from 25%-125% in the last year. Brave words aside, Iran is suffering, the suffering is getting worse, and the sanctions due in July will make the country even more miserable.

Sanctions against Iran won’t miraculously disappear even if the Baghdad conferees reach an agreement. But a delay in imposing part or all of the tougher sanctions due in July is possible. Any movement toward freeing up some of Iran’s production will instantly cause the price of crude to fall, no matter how small the movement. That’s just the way the oil market works these days.

Both Iran and the P5+1 want to be able to claim victory from the coming meeting, and no one wants that victory more than President Obama who is just five months away from an election. Easing tensions with Iran will do more than anything else to lower pump prices, which in turn will be good for the US economy.

The next few days will figure heavily in the US elections, and those of us with long memories may see some parallels with the 1980 presidential election. Predicting what Iran will do is a fool’s game, but politicians in Iran, the US, and Western Europe have too much to lose to let an agreement slip away.

Brent crude prices are down about -0.5% in electronic trading this morning, at $109.77/barrel, while WTI is up about 1.2% at $92.57/barrel.

Paul Ausick

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