Negotiations over Iran’s nuclear program made significant progress on Sunday when negotiators reached a tentative deal. With the world’s fourth largest oil reserves and second largest natural gas reserves, any news affecting the Islamic Republic’s place in the international system is sure to affect global energy markets—on news of the settlement, markets opened with Brent crude dropping over two percent to lows of $108.05 a barrel.
After four days of talks in Geneva, the foreign ministers of the US, UK, France, Germany, China, and Russia negotiated a six-month agreement meant to act as a bridge to a more comprehensive deal in the future. The deal allows Iran to maintain, but not increase, the size of its centrifuge fleet and to retain its stockpile of low-enriched uranium (3.5-5%). In return, Iran must dilute or convert its stockpile of highly enriched uranium (20%), install monitoring cameras in its nuclear facilities, allow unfettered access to IAEA inspectors, and suspend construction of its heavy water reactor, which would have been capable of producing plutonium.
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Iran will be allowed to maintain its current level of oil sales, putting the brakes on American pressure to cut even deeper into Iranian crude exports. This will provide relief to importers of Iranian crude that were reducing import volumes to prepare for upcoming sanction compliance reviews on December 2nd. This means that Iranian crude exports will likely rise from their October level of 715,000 barrels per day to volumes seen in September, somewhere between 1 and 1.2 million barrels per day.
It is estimated that sanctions have cost Iran approximately $80 billion, almost 15% of annual Iranian GDP. Sanctions also bar Iran from accessing its oil export earnings, which are paid into local banks in importing countries. Washington estimates that there is $100 billion trapped in these accounts, and $15 billion more will flow into these accounts over the next six months. As part of the deal, Iran will be allowed to repatriate $4.2 billion of this revenue—effectively, the United States is bargaining with Iran by using its own oil earnings as the carrot.
Less obvious but equally important is the EU’s decision to lift shipping and oil insurance sanctions. While the sanctions on selling Iranian crude remain, the ability to insure oil cargoes will better facilitate sales to destination markets, particularly India and Japan. FACTS Global Energy consultancy estimates that this easing of insurance sanctions could lead to an immediate export increase of 400,000 barrels per day.
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Before the 1979 revolution and the initiation of various sanctions, Iran was the second largest producer in OPEC, exporting as many as six million barrels per day. Sanctions have fluctuated in severity over the years, but one clear effect has been the lack of international capital and technical expertise available to the Iranian oil industry. Its fields are in desperate need of investment and, even if sanctions were completely lifted tomorrow, it would take years for Iran to ramp its production back up to pre-revolution levels.
Some are calling the slump in oil prices a “knee-jerk” reaction, however, and Brent had rebounded to over $111 a barrel by mid-afternoon Monday. Prices are likely to be erratic in the coming days as analysts determine whether the deal is a sign of further productive negotiations over the next six months, or if this newest deal is simply a momentary blip of diplomatic optimism.
By. Rory Johnston