Iran Nuclear Deal: Scenarios for the Global Oil Market

With the July 20 deadline for the P5+1 nuclear talks with Iran fast approaching, Securing America’s Future Energy (SAFE) and Roubini Global Economics (RGE) have assessed three potential oil market and geopolitical scenarios based on differing outcomes from the negotiations: a temporary deal (70 percent probability); a final settlement (20 percent probability); and a failure to reach agreement (10 percent probability).

A Temporary Deal could lead to modest increases in Iranian exports from the H1 2014 average of 1.4 million barrels per day (mbd) to 1.6 mbd by the end of 2014 and as much as 2 mbd by mid-2015 if rollovers become the norm. However, extensions will become unsustainable, raising the probability of settlement or failure later in 2014 into 2015

Final Settlement would eventually lead to higher levels of output. Yet, even if sanctions are lifted, Iran’s oil output is expected to remain below the 2011 level of 4.2 mbd through end-2015 (exports rising to 2.5 mbd and production to 3.6 to 3.8 mbd). Despite the technocratic leadership of key Iranian ministries, Iran’s bureaucracy and tough business environment will remain hurdles for foreign partners.

If there is a Failure to Reach Agreement, sanctions can be expected to tighten somewhat, pressuring Iranian exports back toward their 2013 average of 1.0 to 1.1 mbd by the end of 2014. However, we note that reinstituting sanctions is likely to be exceedingly difficult, especially at a time of oil market tightness. The negotiating partner countries cannot accord an oil price spike, and the U.S. will not want Iran to play a destabilizing role in Iraq.

We would expect oil prices to ease slightly under either of the first two scenarios ($110 and $105/bbl Brent, respectively, by the end of 2014), in the absence of other changes in the global market, but likely rise under the failure scenario, which brings with it a higher chance of military conflict and regional destabilization ($120+/bbl).