Takeaways from last weekend’s agreement on Iran’s nuclear program

Market Realist

Why Iran’s nuclear program affects oil prices (Part 4 of 4)

(Continued from Part 3)

An agreement

Last weekend, Iran came to an agreement with the U.S. and other major countries under which it would take actions to curb its nuclear program. In return, the other countries would agree to relax certain embargo and trade restrictions on Iran.

Why Iran’s oil exports are lower than they could be

Currently, the U.S. and other nations are taking actions against Iran, as they’re asserting that the country’s nuclear program has the potential to be used towards weapons production. They’re imposing sanctions against the country, including restricting oil exports, as leverage to get the Iranian government to agree towards a curtailment of the nuclear activities.

How it affects oil prices

Iran right now is exporting much less than it could be. With the sanctions, the country is having a difficult time finding end markets for its crude production. Eventually, if sanctions lift (and last weekend’s events appear to be a preliminary step towards this), more Iranian crude will come onto the world market that could dampen oil prices. Oil prices are a major driver of earnings for energy producers such as ExxonMobil (XOM), Chevron Corp. (CVX), and ConocoPhillips (COP), which are major components of energy ETFs such as the Energy Select SPDR ETF (XLE) and the iShares Energy ETF (IYE).

How it affects the WTI-Brent spread

WTI represents U.S. crude prices, while Brent represents international crude prices. The two are similar in quality and used to trade nearly in lockstep with each other. Now the correlation between the two benchmarks has broken down somewhat, as U.S. crude production has surged and created different supply and demand dynamics for the U.S. versus international markets. If Iranian crude exports increase, this represents an increase in the supply of international crude, and it could bring the spread between WTI and Brent closer.

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