Iran nuclear deal: 4 key implications for commodity markets

1) Lower oil prices

Brent crude prices fell around 2% following the announcement of the deal. However, it may not be until early 2016 until we actually see any additional Iranian crude being exported.

The medium term impact will depend on the when sanctions will be lifted and then how quickly Iran can raise oil production. Sanctions are likely to remain in place until the end of the year when the IAEA published a report on Iran’s compliance with the terms of the deal.

At this point it may be possible for Iran to begin selling the crude it has stockpiled offshore, somewhere between 30 and 50 million barrels. Although this could come to the market very quickly, it wouldn’t be in Iran’s interest to just dump this.

According to Goldman Sachs it could then take another six months or so to revive aging oil wells, potentially adding 0.5 million b/d (vs current output of 2.8 million b/d).

The longer term impact will depend on Iran’s ability to attract foreign investment and then for that to bring additional production to market. Estimates from Wood Mackenzie point to output potentially rising as high as 4.4 million b/d by 2025.

2) More pain for higher cost producers

With all OPEC members free to produce what they wish, extra output from Iran will help assist Saudi Arabia’s strategy of pressuring those higher cost producers.

More downward pressure on the futures curve, not just near term prices but 12-18 months out as investor’s price in the return of Iranian barrels will make it harder for US shale oil producers to hedge their crude production.

Many of the weaker shale producers have relied on hedging to preserve their profit margins and to maintain credit lines with the banks. If hedging becomes less financially beneficial then it will act as a brake on future drilling activity, particularly for those financially weaker operators.

3) Complications for OPEC?

Pressure from those OPEC producer’s outside of the Middle East for output to be cut to help support prices is likely to intensify as Iran increases oil production.

The return of Iranian crude is an issue for Saudi Arabia too, it being chemically similar to Saudi crude as well as from Kuwait and Iraq. More Iranian crude will mean more competition in those markets that these OPEC producers sell into.

Yet, any change in Saudi strategy just gives a free pass to those higher cost producers (see point 2).

Expect more details on how Saudi Arabia could respond at the next OPEC meeting, scheduled for 4th December.

4) It’s not just about oil

Iran has the second largest gas reserves in the world, yet its market share of the global gas trade is less than 1%. The potential for growth here is thought to be more longer term though.

Meanwhile, although Iran ranks as the world’s seventh largest oil producer, it vies with the US as the biggest grower of pistachios. Although China, India and Turkey remain large buyers, current restrictions on banking and shipping are limiting Iran’s ability to export the cocktail nibble into Europe.

Pistachio prices have risen 40% over the past five years due to shortages. The removal of sanctions could see supply increase, putting downward pressure on prices.

More broadly though, the Iranian nuclear deal adds to the bearish sentiment for commodities. Recently investors have focused on fears over Greece and China as potential brakes on economic growth and hence commodity demand.

Although there are big uncertainties about timing, the direction of travel is a lot clearer with Iranian supply to add to downward pressure on oil and other commodities.

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