US Exits Iran Nuclear Deal but Analysts Disagree About its Impact on Oil Prices

Some worry Trump's move on Iran might cause OPEC to quit its output reduction strategy. File Image / Pixabay

The predicted tsunami of analytical thought, fears, and indifference accompanied U.S. president Donald Trump's decision on Tuesday to scrap the Iran nuclear deal, the announcement of which caused West Texas Intermediate to plummet $1.67 per barrel to $69.06 and Brent to drop a comparatively mild 47 cents, to $75.71.

The outcome of Trump's decision is that sanctions against the Islamic state will be reimposed "subject to certain 90 and 180 day wind-down periods," according to a White House press release - which has caused some pundits to believe Trump will use that time to work out some other sort of arrangement with Iran and its allies.

The common line of thought is that lack of international support for renewed U.S. sanctions will likely only remove 300,000-500,000 barrels per day (bpd)of Iranian crude from the market; but this didn't prevent Michael Cohen, director of energy market research for Barclays, from warning that this could be the start of more hawkish foreign policy that "could fuel already elevated tensions in the Middle East, specifically in Iraq, Syria, and Yemen, as the hostilities between Iran and Saudi Arabia escalate."

He went on to forecast that "The geopolitical consequences of a possible dismantling of the [nuclear deal] would likely to play a larger and long-lasting role in pushing oil prices higher than short-term policy uncertainty."

However, this type of prediction, echoed by other analysts in recent weeks, hinged around the fear that Iran's oil production could drop from the current 4 million bpd to only 1 million, thus triggering a supply shock that is price supportive.

Even before Trump's Tuesday announcement, experts such as Alejandro Barbajosa, vice president at Argus Media, told CNBC that "We've already seen that bullishness factored in over the past few weeks....the markets have already reacted to the expectation of less supplies going forward," which means that as a result it will be difficult for oil prices to advance.

Of a similar mindset was Lori Heinel, deputy global chief investment officer at State Street Global Advisors, told Bloomberg television that, "We don't think oil prices go a lot higher from here," adding that U.S. shale production has put a cap on it, along with the availability of sustainable energy sources, as well as the lack of demand in the longer term.

She also echoed a growing new sentiment of many other colleagues that crude doesn't have much of an impact on economies overall anyway - which of course may be a surprise to oil-dependent nations such as those in the Middle East.

As for actual price predictions, Steve Cornell, co-chief executive officer of Sasol Ltd., pegged the "long-term" price of crude at a meager $60 per barrel.

One intriguing possible outcome of Trump's decision, voiced by Barbajosa, is that while only 500,000 bpd of Iranian crude removed from the market may be neither here nor there in the grand scheme of things, it might give the Organization of the Petroleum Exporting Countries (OPEC) an excuse to "exit from the current strategy of restrained supplies, because what we see is that there is little scope for them to start producing again at the levels they would like to produce without having a negative effect on prices."

Meanwhile, Iranian oil producers are predictably putting on a defiant show, with Gholamreza Manouchehri, deputy head of the National Iranian Oil Company stating on its website that the U.S.  "cannot stop Iran," and adding that his country planned to finalize seven upstream contracts worth around $40 billion with foreign investors: "These contracts will be finalized under the current challenging circumstances by mid-Iranian year (October)....this planning has been made with the assumption of delayed presence of Western companies."

In retrospect, the actual crude trading leading up to Trump's decision has been entirely predictable, but forecasts for the future health of the crude market have been all over the map, with venerable institutions such as Bank of America Merrill Lynch insisting that prices will escalate to $80 but others certain that alternative energy will wipe out oil demand in a decade.