Iran deal: what are the implications for the oil market?

If the chance to revive the deal falls apart, tougher sanctions could cut another 500,000 barrels per day or so from Iranian oil exports

If the deal is signed, by next year, 1-1.2 million barrels per day of Iranian supply would return to the market. AP

Iranians often compare their country’s shape to a cat. The nuclear deal with the US, EU and other leading countries, declared dead on several occasions, has used up eight of its nine lives. If it does not survive the latest negotiations, it means bad luck to all participants.

The Joint Comprehensive Plan of Action (JCPOA) was signed in 2015 under the administrations of former presidents Barack Obama and Hassan Rouhani, but Donald Trump announced the US’s withdrawal in 2018.

Current US President Joe Biden missed a possible window simply to re-enter on taking office, and dare Iran to resume its full compliance, or place itself clearly in the wrong versus the UN Security Council.

Although he did not do that, negotiations on a renewed deal have proceeded. They appeared close to success in February — but the invasion of Ukraine derailed them. Russia demanded the western sanctions imposed on it should not affect its co-operation with Tehran.

On August 8, EU negotiators submitted a “final offer” and discussions continue to bridge remaining points, including investigations over findings of past nuclear material, and Iran’s demand for guarantees that a future American president would not again abandon the accord, or at least impose a winding-down period. Iran has, though, apparently dropped its previously immutable requirement that the US delist the Revolutionary Guards as a terrorist organisation.

If the chance to revive the deal falls apart, the US will turn back to tougher enforcement of sanctions on oil and petrochemical sales. That could cut another 500,000 barrels per day or so from Iranian oil exports — driving up prices again, particularly towards the end of this year as Europe’s ban on Russian oil purchases comes into force. Filling the gap would further stretch Opec’s limited capacity.

Israel would likely continue its campaign of sabotage in a probably futile attempt to slow the nuclear programme’s progress.

Iran would probably respond by stepping up its campaign of harassment of shipping and attacks on oil infrastructure with drones, missiles and mines, directly, anonymously and via its allied groups. An outright Israeli or US attempt to destroy nuclear sites, as Mr Biden threatened as a last resort, would unleash a more intense conflict.

Washington, London, Paris and Berlin do not want that while they are dealing with what is to them a far more threatening enemy in Moscow.

A revival of the JCPOA, in contrast, would buy time on both fronts. Russian president Vladimir Putin met Iranian president Ebrahim Raisi and supreme leader Ali Khamenei in July, and there was talk of sharing experience on sanctions evasion, and of Iran supplying drones.

But Iran does not again want to be used by Russia as a cat’s paw. Moscow is bogged down in Ukraine, so is unlikely to offer any serious military assistance in the event of hostilities.

The two are also keen energy competitors. The arrival of discounted Russian oil in Asia has forced Iran to cut its prices for selling to China. Lifting sanctions would put the boot on the other foot: Iran could supply India, which has emerged as the major market for homeless Russian crude.

The release of the US’s strategic petroleum reserves at about 1 million bpd ends in mid-October; Iran’s 100 million barrels of stored crude and condensate could effectively replace that for three months. By next year, 1-1.2 million bpd of Iranian supply would return to the market.

This would restrain prices and not be good news for the Middle East’s other oil exporters in the short term. They would however benefit from greater market stability, rather than a spike and crash. In fact, once Iran achieves its maximum sustainable output, it would be time to bring it back into the Opec+ framework. This is also a convenient opportunity for Saudi Arabia and the UAE to renegotiate quotas.

After restoring oil output to pre-sanctions potential, it is unlikely Iran would make a successful dash for much higher capacity. The Sepah, or Revolutionary Guards, and companies linked to Mr Khamenei’s foundation, have their claws into Iran’s petroleum engineering and contracting industry. They will defend their territory against encroachment by international oil corporations, whether western, Russian or Chinese. Anyway, the continuing terrorist designation will put them off-limits for most counterparties.

Meanwhile, international investors will be deterred by the possibility that a Republican president in the US will again tear up the deal in two years’ time.

With the world’s second-largest gas reserves (after Russia), existing sales to Turkey, and lying athwart routes from gas-rich Turkmenistan to Europe, Iran could be a centrepiece in European and global diversification from Russian gas. Iran hopes to revive plans to pipe gas to Oman and to energy-starved Pakistan.

But, as on so many other occasions over the past quarter-century, sanctions-related obstacles, political infighting and Iran’s commercial unreality will probably conspire to frustrate such hopes.

Europe will anyway not be keen either to make the long-term commitments required, because of its climate goals, or to swap dependence on one unfriendly autocracy for another.

A deal will gain Europe and the US resilience against Mr Putin’s energy weapon, while Iran will benefit economically. These are strong incentives to jump the gap, even if there’s no certainty.

“No deal” would not continue the complacent status quo, but means another step on a perilous path.

Robin M. Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis