Intelligence Report: Iran Negotiations to Impact Oil Market

The July 20 deadline for nuclear talks between the P5+1—the United States, Russia, United Kingdom, France, China, and Germany—and Iran is fast approaching, and the outcome will undoubtedly have significant implications for the global oil market and overall regional political stability. In response to this emergent issue, SAFE has released its newest Intelligence Report: Iran Nuclear Deal: Scenarios for the Global Oil Market, the third in a series designed to explore breaking events affecting the global energy landscape. The report, created in collaboration with Roubini Global Economics (RGE), assigns probabilities to three possible outcomes from the P5+1 negotiations:
  • A Temporary Deal leading to a short-term, modest increase in Iranian oil production (70 percent probability)
  • Final Settlement leading to higher long-term oil output (20 percent probability)
  • Failure to Reach an Agreement, resulting in renewed attempts to sanction Iran and downward pressure on Iranian oil production (10 percent probability)
Exploring the implications of each scenario for global oil markets and oil prices, the analysis finds that P5 +1 negotiators may find it difficult to reinstate sanctions on Iran’s oil exports due to tightened oil market conditions and the increasing ability of countries like China and India to work around the sanctions. In its most recent assessment of oil markets, the Department of Energy estimated surplus OPEC spare oil production capacity to be less than 1.7 million barrels per day in July, a relatively tight margin. “While oil markets and oil prices will not be the sole drivers of the negotiating position of the United States and other Western nations, the current dynamics will almost certainly have an impact,” said SAFE CEO Robbie Diamond. “Reinstating sanctions at the current moment would deprive the market of additional Iranian barrels at a time when uncertainty and instability in Iraq, Libya, Syria, and elsewhere is already elevating risk. This ups the pressure on the P5+1 to at least settle for an extension. This is a classic example of the constraining effect that oil dependence can have on American foreign policy, something we should find unacceptable.” SAFE-RGE’s analysis anticipates a slight drop in oil prices versus the baseline under scenarios in which the negotiations lead to either a temporary settlement or a final agreement, with Brent prices averaging $110/bbl and $105/bbl, respectively, by the end of 2014. However, in the unlikely scenario (10 percent) that negotiations fail and participating countries are unable to reach an agreement, prices could potentially reach $120/bbl or more, with increased chances of military conflict and regional destabilization. The initial creation of the Joint Plan of Action (JPA) by the P5+1 in November 2013 set the stage for a long-term, comprehensive settlement designed to restrict Iran’s nuclear program in exchange for limited sanctions relief, with negotiations set to expire on July 20, 2014. Failure to either reach a final settlement or a temporary extension could have immediate repercussions that would prompt action by western governments to minimize negative effects on the global economy in 2014 and beyond. Today’s report argues that U.S. and global policymakers must work together to put in place measures to limit the potential impacts of failed negotiations with Iran. These considerations include a transparent, public plan to offset lost oil production with public stocks such as the Strategic Petroleum Reserve (SPR), collaboration with China as it enlarges its own stocks, and working among P5+1 countries to avoid side deals that could undermine political stability in the Middle East. Today, oil fuels 92 percent of the United States’ transportation sector. Injecting uncertainty into the oil market by restoring sanctions (and thus driving down Iranian production) could adversely affect growth across the global economy and would limit American policy options in the region. “Failed negotiations due to Iranian intransigence could bring a higher probability of military conflict involving Iran,” the report argues. “Possible flashpoints could include a potential Israeli strike on Iran, (temporary) blockage in the Strait of Hormuz, or a regional nuclear arms race.” Successful negotiations, however, “would not only add incremental Iranian barrels to the market,” but would also support “stronger global growth in 2014 and 2015.” The entire report is available here.