Monday, November 25, 2013

Oil Prices & the Iran Nuke Deal (excerpt)

The nuclear deal signed on Sunday with Iran will not allow any more Iranian oil into the market, nor let western energy investors into the country. However, it does freeze US plans for deeper cuts to Iranian crude exports. "In the next six months, Iran's crude oil sales cannot increase," according to a fact sheet posted by the White House on the US State Department's website on Sunday.

US sanctions effectively bar Iran from repatriating earnings from oil exports, forcing customers to pay into a bank in their country. Washington estimates that Iran has around $100 billion in foreign exchange earnings trapped in such accounts. Under the terms of the deal, Iran will be allowed access to $4.2 billion of oil export revenues. But nearly $15 billion still will flow into accounts overseas over the next six months, according to the US government.

Nevertheless, if the interim agreement is setting the stage for a diplomatic resolution of the Iran nuke issue, then the price of oil could drop even before sanctions are completely removed. The price of a barrel of Brent crude oil jumped $3.36 to $111.95 last week on pessimism about a deal getting done. It could tumble on expectations of a rebound in Iran’s crude oil exports, which plunged by more than one million barrels per day since sanctions were imposed in early 2012.

Of course, Libya’s oil output has also dropped over the past few months as a result of the anarchy caused by numerous rival militia groups. Nevertheless, world crude oil supplies rose to a new record high of 90.9mbd during October, led by a sharp increase in non-OPEC production in recent months. The combined output of the US and Canada rose to a record 11.5mbd during October, exceeding Saudi Arabia’s output of 9.5mbd.

These developments should put a lid on energy inflation. In the US and Europe, CPI energy inflation rates, on a year-over-year basis, were -4.8% and -1.7%, respectively, during October. The price of gold continued to slide last week, suggesting that other commodity prices may also remain weak.

Today's Morning Briefing: The Nuclear Option. (1) Nuclear reactions. (2) Reid lobs the bomb. (3) Yellen is in like Flynn. (4) Flying with the doves. (5) The Supreme Leader got a good deal. (6) A second Nobel Peace Prize. (7) Badly wanting a bad deal. (8) “Historic mistake.” (9) Obamacare as “vaporcare.” (10) Oil prices could tumble. (11) Stage set for stock market melt-up. (12) US economy muddling along. (13) Germany looking up, while France looking down. (More for subscribers.)

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