Iran and world powers are continuing negotiations to craft a potentially historic agreement, which would lift sanctions constraining the country’s oil export.
Will they finally come to an agreement on Tehran's nuclear programme?
The price of oil has ebbed and flowed in a mirror to international diplomacy this week. As politicians in Iran and Greece worked to find resolution to critical issues, there were fears the price would plunge once again. But late yesterday as talks continued – despite the odds – the price of oil recovered.
On Monday it hit a three week low as negotiations over nuclear arms and Greece’s position in the Eurozone stalled.
In Greece after it historically failed to meet its repayment on its bailout, Prime Minister Alexis Tsipras urged his citizens to withstand the threats from the IMF. It wants them to raise taxes and slash welfare to meet debt obligations. Greece shut down banks in an effort to prevent panicked withdrawals, a capital control which resulted in widespread risk aversion. The Prime Minister is putting all his political capital on getting people to vote against the debt restructuring plan in an historic referendum this Sunday.
The clock was ticking too in Iran where world powers desperately tried to build trust with Iran over its nuclear ambitions. Last ditch diplomacy saw a flurry of meetings over the week with Iran rejecting allegations it wants to develop nuclear arms. However its refusal to allow the International Atomic Energy Agency unbridled access to sensitive military sites has not given the west much comfort.
On Wednesday oil futures sank as the US Energy Information Administration reported an unexpected increase in stockpiles from the week before. “The overall feel is that we have more than enough crude and the market could be in a bearish tilt hereon with the Greece and Iran factors in play,” said Tariq Zahir, oil trader and managing member at Tyche Capital Advisors in Laurel Hollow, New York. U.S. crude fell $2.48 to $56.99. The last time slid as much in a day was on April 8.
But then on Thursday came news that the deadline in Iran had been extended until July 7th. If the diplomats are able to find resolution to this current impasse it would be a considerable breakthrough for Iran. Sanctions to oil export which have strangled its economy would be lifted.
US benchmark WTI climbed to $57.17 a barrel, and brent North Sea crude rose to $62.58 a barrel in London afternoon deals.
So to Sunday first in Greece and then Tuesday in Vienna and Tehran – rarely before has there been such a contrast in those who hold the power to affect the price of oil. A public referendum on Sunday to decide whether to abide by the IMF’s austere rules or go it alone, and passionate diplomacy behind closed doors in Vienna and Tehran until Tuesday.
Whatever happens in Greece, the real game changer will be what happens in Iran. “With the deadline now extended into next week on finding a comprehensive agreement on Tehran’s nuclear programme, the markets will monitor closely the outcome of the negotiations,” said Sanjeev Gupta, energy expert at Ernst and Young. “Iran sits on the fourth-largest oil reserves and second-largest gas reserves in the world.”
The implications of a re-arrival of Iran onto the global oil stage are huge. “If the nuclear negotiations with Iran are brought to a positive conclusion, there is also the threat of additional oil reaching the market from Iran,” said Carsten Fritsch, analyst at Commerzbank.
OPEC has recently hit a three year high of production at 31.6 million barrels per day in June, and Iraqi exports are also at record peaks.
“With these strong growth rates, OPEC supply growth is now challenging non-OPEC supply growth,” analysts at JBC Energy in Vienna wrote.
However lifting sanctions does not necessarily mean international oil companies will rush headlong into business deals. The country needs help to fully take advantage of its underground wealth but the possibility that sanctions snap back because Iran might run afoul of the terms of the agreement adds an element of risk.
As the president of the National Iranian American Council, Trita Parsi told Bloomberg, “Businesses have become terrified about doing business with Iran, and it’s not easy to un-terrify them.”