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Constraints That Forced the Iranians to Bargain Have Been Shattered by Agreement

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FILE - In this Wednesday, Sept. 11, 2013, file photo, oil pumps work in the desert oil fields of Sakhir, Bahrain. Oil prices could be headed lower after the preliminary nuclear deal between Iran and six world powers, even though it does not loosen sanctions on Iran's oil exports. (AP Photo/Hasan Jamali, File)

Dan Dicker is the President of MercBloc Wealth Management Solutions and the author of Oil's Endless Bid. He has been a trader on the floor of the New York Mercantile Exchange for nearly 3 decades. You can find his smart commentary regularly on TheStreet.

Today’s report of a deal with the Iranians arresting the development of their nuclear capability has already had a significant affect on the oil market.  But what will be the continuing effect of this ill-conceived relaxation of sanctions?

There had been strong protest against any kind of compromise deal with the Iranians going into negotiations this weekend in Geneva.  Republicans here in the US, as well as the Israelis and the Saudis, have expressed dismay at the timing of negotiations and a deal.  What was clear from the Iranian request for negotiations is that sanctions, after years of application, were finally working.

That’s because it hasn’t been the trade embargo that has had the greatest negative effect on Iran; it’s been the strong fencing around banking activity financing Iranian commerce that’s been so economically debilitating.  Not only were US banks forbidden from it, but also ANY foreign bank doing business with the Iranians had been barred from US government business.  This had put legitimate Iranian oil export at a virtual standstill, even as perhaps 600,000 barrels a day of Iranian crude was still dribbling out through bartered or cash deals. 

The Obama administration will claim that the export limitations on the Iranians of 1 million barrels a day haven’t been changed with this deal, but don’t believe them.  It’s really a case of the relaxation of financial constraints that will embolden the Chinese and Indian banks into beginning again slowly to do business with the Iranian oil brokers.  You can bet that the solid discipline against Iranian commerce that had brought the Iranians to the bargaining table is now shattered. 

For the Iranians, while they may have to wait a bit for the new financing to arrive, there is a massive amount of "liquid money" to release into a shriveled economy: almost 100m barrels of excess stockpiled crude and another possible 1.2m barrels a day of production potential can almost immediately be restored (with the right export deal in place).

That export potential had a moderate effect on the Brent market this morning, down a little less than two bucks, but will likely have a stronger downward effect as the sanctions begin to ease. 

What we cannot predict yet is the reaction of the Saudis; with full production of more than 10m barrels a day, they have the swing barrels to make the increased Iranian export virtually unnoticeable to the global market.  But with their dismay of this agreement, there is a small chance that they might go the entirely opposite way, engaging in a price war and glutting the market to limit the economic gains of their Iranian rivals. 

For the stocks connected to the oil market, you’ll find the European and multinational integrated stocks which rely upon Brent pricing to suffer initially.  Watch for a small pull back in shares of BP (BP), Shell (RDS-A) and Total (TOT).  More likely to suffer in the long haul will be the refining stocks, which had been benefiting from a very strong WTI/Brent spread which will likely come back a little with the prospect of new Euro Asian barrels from Iran slowly percolating into the market. 

Much of what will ultimately be the result of the Iranian deal depends upon the strength of enforcement of the US coalition, difficult to predict, and the Saudi reaction, equally difficult to predict. 

For now, it doesn’t make sense to restructure your energy portfolio based upon this agreement.  But, restructuring your political portfolio based upon the stupidity of this ill-timed and lightweight arrangement with the most dangerous regime in the Middle East? 

That I heartily recommend.