What's the Impact of the Iran Deal on Oil Stocks? - Analyst Blog

After 20 months of negotiations, a nuclear deal has been reached between Iran and six world powers. The agreement is meant to restrict Iran from manufacturing nuclear weapons in exchange of removing economic sanctions – which also include constraining crude oil export from Tehran. But the big questions that arise are why and how the nuclear accord might impact the oil market.

Impact of Nuclear Deal on Oil

Since 2006, the six big powers – the U.S., UK, France, China, Russia and Germany – had been negotiating with Iran to reach a nuclear pact with an aim to curb Iranian nuclear activities. These nations feared that Iran would misuse the power by creating nuclear bombs although the Islamic country maintained that its enrichment in uranium is meant to generate electricity, manufacture medicine and for other peaceful purposes.

But now, with the historic agreement, every road that led to manufacturing nuclear weapons in Iran has been blocked for at least 10 years. In fact, Iran needs to reduce its huge uranium stockpiles either by diluting it or by shipping it abroad. Moreover, as part of the agreement, the U.S. has introduced new provisions to strictly monitor the Iranian facilities and military sites.

Let's analyze why most of the investors are apprehending that the nuclear accord will take a toll on oil prices:

As per the U.S. Energy Information Administration, Iran has 10% of the crude reserves in the world. The country is also a member of the Organization Of Petroleum Exporting Countries (OPEC) with 13% of the cartel’s oil reserves. Hence, with the sanctions being removed, Iran will start exporting huge volumes of crude.

Will Iran’s resumption of oil export will push oil price further down?

We know that the crude market is highly oversupplied primarily owing to the U.S. shale revolution. With new techniques like advanced hydraulic fracturing and horizontal drilling, U.S shale producers have been increasing oil production.

On top of that, with an aim to snatch the market power of U.S. shale producers, OPEC also started producing oil at record levels. In fact, OPEC’s crude production for the month of June came in at 31.28 million barrels per day, the highest since Aug 2012.

Now analysts say that if Iran, with its significant oil reserves, starts exporting oil to an already oversupplied market, crude price will further fall down.

However, the price of WTI crude surprisingly rose 1.6% to touch $53.04 per barrel, the highest since Jul 2. This is because Iran will take months or more to ramp up its production to previous levels. Moreover, it will take around two months for the U.S. to get congressional approval for the nuclear pact, indicating that the sanctions won’t be removed immediately.

Oil Stocks After the Deal

It is clear that Iran will take time to expedite its oil exports. But we can say that the future of oil price depends strictly on how much and how quickly Iran can successfully boost oil production.

Let us see how the Iranian deal will have impacted big energy players like Exxon Mobil Corporation XOM, Valero Energy Corporation VLO, BP plc BP and Chevron Corporation CVX.

Among these oil giants, Exxon Mobil, BP and Chevron are integrated firms with extensive upstream operations, and hence have positive correlation with oil prices. As a result, with a short recovery in oil prices and considering the fact that Iran will take time to flood the oversupplied market, the share prices of these companies were in the green yesterday. Exxon Mobil, BP and Chevron rose 0.8%, 0.9% and 1% respectively on the NYSE.

However, Valero Energy, being the largest independent refiner in the U.S, saw its share price fall − 0.8% in the NYSE − since the input price went up.

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