Oil Market Knee-Jerk Reaction To Nuclear Deal Unjustified
A group of exhausted diplomats did the unthinkable. The P5+1 countries and Iran came to a massive and historic framework agreement over Iran’s nuclear program, paving the way for a final deal to be hashed out before the real deadline in June. Negotiations went past the self-imposed March 31 deadline and despite sinking optimism on April 1, all parties managed to overcome enough of their differences to hammer out the outlines of a deal. Iran’s ability to build a nuclear weapon will be hampered, and crucially for oil markets, Iran is within reach of receiving relief from western sanctions.
It is unclear how quickly Iran will be able to ratchet up its oil production, however, even if a deal is forged. Reviving some of its battered oil fields will require international investment. To be sure, Iran is an enormous prize for the oil majors, but there will likely be a lag between sanctions relief and actual investment. Iranian President Hassan Rouhani has courted foreign oil companies, but even if sanctions are removed, oil companies will think twice before they jump in. That’s because the U.S. insists on a mechanism of having sanctions “snap back” into place if Iran does not live up to its side of the deal. For oil companies thinking about pouring billions of dollars into a country, the possibility that sanctions will snap back presents enormous risk. After only recently having seen what happens when international sanctions are brought down like a hammer – ExxonMobil had to pullout of a major drilling project in Russia last year because of sanctions – the industry will take its time. Consequently, despite the historic agreement – a very important development indeed – the flood of Iranian oil will likely take quite a bit of time before it begins flowing.
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