A Nuclear Deal With Iran Could Increase Global Oil Glut

Mar 18, 2015
Originally published on March 22, 2015 1:59 pm

It's not just Benjamin Netanyahu and other world leaders who are scrutinizing the Iran negotiations. Oil traders are, too. That's because there's already an oil glut, and an Iran deal could lift sanctions and mean even more oil.

"Even the thought that Iranian oil could be unleashed on the global market is, you know, getting people to sell first and ask questions later," says Phil Flynn, a senior market analyst and oil trader at The Price Group in Chicago.

He says in the last couple of days traders are trying to read the geo-political tea-leaves, and some think they see a deal coming with Iran.

"Especially when you have Secretary of State John Kerry standing next to the energy secretary of the United States in on the talks," he says. "Why would you have the energy secretary in on the talks if you weren't really getting prepared for more oil on the market? The Iranians expect a deal because they're already talking to the oil companies saying, 'Come look at us.' "

Of course the oil traders don't really know if a deal with Iran will happen. The U.S. Energy Secretary obviously knows a thing or two about safely storing nuclear material so maybe that's why he was there. But, if an Iran deal does come together, Flynn says it will push oil prices even lower. He says with the economic slowdowns in China and Europe the oil supply is exceeding demand by about 2 million barrels a day. He says Iran could add another 1 million barrels a day on top of that.

And that's just the beginning says Fadel Gheit, an energy analyst with Oppenheimer & Co.

"Oh absolutely. The 1 million barrels, that is the appetizer," Gheit says. "That is not the main meal yet."

Gait says oil companies from around the world would like to get into Iran and develop its reserves to bring much more oil online down the road.

As far as oil prices going forward, Gheit says Saudi Arabia if it wanted to could single handedly push prices back up if it cut back on its oil production. But, the Saudi's keep pumping and so prices stay low. He says that's likely strategic — in part it hurts some U.S. shale-oil producers, and it puts the squeeze on Saudi Arabia's neighbor, Iran.

"Saudi Arabia is really giving the rest of the world a gift," he says. "Breaking the logjam with Iran."

That's because cheap oil is a reason that Iran may be more willing now to cut a nuclear deal.

"Well, it's clear that the combination of sanctions and low oil prices are hurting Iran," says Matthew Bunn, a professor at Harvard and a former White House adviser working on nuclear non-proliferation. "And they urgently want sanctions to be lifted. That's certainly one of the dynamics in the talks right now."

For his part, Bunn thinks the potential nuclear deal with Iran would be a good thing. So, he says, when it comes to cheaper oil in addition to giving millions of Americans extra money in their pockets, Bunn has another reason to be happy when he drives away from the gas pump. "Low oil prices are good for our economy, but at the moment they're also good for our foreign policy, they're helping to increase the chance of avoiding an Iranian nuclear bomb."

Of course, there are plenty of critics of the emerging deal as well.

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STEVE INSKEEP, HOST:

We report next on one more factor behind the drop in oil prices. The price of oil has now fallen to about $43 per barrel. That's the lowest in years. NPR's Chris Arnold reports this is partly because of the potential nuclear deal with Iran.

CHRIS ARNOLD, BYLINE: It's not just Benjamin Netanyahu and other world leaders who are scrutinizing the Iran negotiations; oil traders are, too. That's because there's already an oil glut, and an Iran deal could lift sanctions and mean even more oil.

PHIL FLYNN: Even the thought that Iranian oil could be unleashed on the global market is, you know, getting people to sell first and ask questions later.

ARNOLD: That's Phil Flynn, a senior market analyst and oil trader at the Price Group in Chicago. He says in the last couple of days, traders are trying to read the geopolitical tea leaves, and some think they see a deal coming with Iran.

FLYNN: Especially when you have Secretary of State John Kerry standing next to the energy secretary of the United States in on the talks. Why would you have your energy secretary in on the talks if you weren't really getting prepared for more oil on the market? The Iranians expect a deal because they're already talking to the oil companies and say, hey, come look at us.

ARNOLD: Of course the oil traders don't really know if a deal with Iran will happen, but if it does, Flynn says it will push oil prices even lower. He says with the economic slowdowns in China and Europe, the oil supply is exceeding demand by about 2 million barrels a day. That's the glut. He says Iran could add another 1 million barrels a day on top of that. And that's just the beginning, says Fadel Gheit. He's an energy analyst with Oppenheimer & Co.

FADEL GHEIT: Oh, absolutely. I mean, the 1 million barrel, that is the appetizer. That is not the main meal yet.

ARNOLD: Gheit says oil companies from around the world would like to get into Iran and develop its reserves to bring much more oil online down the road. As far as oil prices going forward, actually, Gheit says, Saudi Arabia, if it wanted to, could single-handedly push prices back up if it cut back on its own oil production, but the Saudis keep pumping and so prices stay low. He says that's likely strategic. In part it hurts some U.S. shale oil producers, and it puts the squeeze on Saudi Arabia's neighbor, Iran.

GHEIT: Saudi Arabia is really giving the rest of the world a gift for breaking the logjam with Iran.

ARNOLD: That's because cheap oil is a reason that Iran may be more willing now to cut a nuclear deal. Matthew Bunn is a professor at Harvard and a former White House adviser working on nuclear non-proliferation.

MATHEW BUNN: Well, it's clear that the combination of sanctions and low oil prices are hurting Iran, and they urgently want sanctions to be lifted. That's certainly one of the dynamics in the talks right now.

ARNOLD: For his part, Bunn thinks that the potential nuclear deal with Iran would be a good thing. So he says when it comes to cheaper oil, in addition to giving millions of Americans extra money in their pockets, Bunn has another reason to be happy when he drives away from the gas pump.

BUNN: Low oil prices are good for our economy, but at the moment they're also good for our foreign policy. They're helping to increase the chance of avoiding an Iranian nuclear bomb.

ARNOLD: Of course, as we've heard on this program, there are plenty of critics of the emerging deal as well. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.