A final accord over Iran’s nuclear deal with the international community could lead to remarkably lower oil prices. When that happens, a glut of Iranian oil will hit an already oversupplied oil market.
Over the past few months, I have been following the intense negotiations between Iran and P5+1 (China, France, Russia, the United Kingdom, and the United States, plus Germany) closely. Currently, the noise surrounding the negotiations is at its most positive with progress being made over major issues
Keep in mind, sanctions currently limited Iran’s ability to sell oil, and have cut Iran’s exports to just over one million barrels a day. Sanctions were imposed on Iran by the U.S. and the international community in 2010, targeting Iran’s economic activities.
Oil is believed to make up 80% of Iran’s exports. Iran is the third-largest oil producer in the Organization of the Petroleum Exporting (OPEC) cartel. Prior to sanctions, Iran was pumping about 2.8 million barrels per day.
If a deal is announced, there are about 30 million barrels of Iranian oil in floating storage possibly ready to hit the open market. Imagine the oversupplied oil market trying to digest even more Iranian crude.
On the other side, all evidence suggests that demand is set to slow down. Economic growth in China, the world’s second-largest economy, is grinding to a halt. Moreover, Greece’s exit from the eurozone would weaken the continent’s common currency, making it more expensive for European consumers to purchase dollar-denominated crude.
This isn’t rocket science. It’s just comes down to supply and demand. When there is an excess in supply and not enough demand, prices will go down. This is a scenario that is likely going to happen in the next few weeks.
Of course, it’s impossible to predict exactly where oil prices will bottom. Over the past few weeks, crude prices have fallen from $60.00 per barrel to around $51.00 per barrel. But this could just be the beginning.
If a deal with Iran is announced, we could see oil prices fall as low as $35.00 per barrel by the end of the summer.