Low oil prices, Iran and Middle East stability

April 2 marked an important milestone in the negotiations to curtail Iran's nuclear ambitions when leaders of six world powers reached an understanding with Iran about next steps on the framework of a long-term deal. While an important political achievement, the negotiations to reach an agreement by the June 30 deadline are likely to encounter significant hurdles. In the short term, IHS does not expect the interim agreement to have a significant effect on oil supply and prices. The greatest effect of the announcement will be on U.S.-Iranian relations and relations between countries within the Middle East, specifically Iran and Saudi Arabia.

The Iran deal was a central topic of the April 7 IHS webinar entitled "Low Oil Prices and Middle East Stability." It was the final installment of the IHS Great Deflation webcast series. IHS experts discussed the many challenges that remain before a final agreement can be reached to lift economic sanctions on Iran, including oil exports, in exchange for Iran's consent to limit its nuclear program.

The April 2 interim agreement is a significant step forward, but as of yet there are no specific details, and we are sure to see resistance from skeptics in the United States and Iran as details of the deals are worked out, said IHS Managing Director Raad Alkadiri.

Regardless, the deal signals a turning point, said Alkadiri. The major achievement is that Iran and the United States have found the goodwill to bring this preliminary agreement to fruition. Iran is euphoric about the prospects of having its sanctions lifted and the United States will likely avoid war and the possibility of an Iran with nuclear weapons, he said.

What is less certain is the effect the agreement will have on the dynamics of the Middle East. To be sure, this is a turning point for the region as well. What Iran's reemergence into the international community will mean for oil policy and prices-and for stability of the region-remains to be seen. IHS believes that in the short term Iran is likely to add to the already tense climate in the region, said Alkadiri. However, in the long term, the deal may serve as the impetus for the region to create a new regional security framework.

No hegemon

The deal comes at a time when the Middle East is in disarray. It lacks an external hegemon, and the vacuum created by U.S. withdrawal has left local powers in a vicious scramble for dominance. The precipitous fall in crude oil prices over the last five months has added to the economic pressures on Middle East states, whose foundations have already been significantly weakened by ethnic and tribal strife within their borders.

Most specifically, the Iran deal is likely to exacerbate the tensions between Saudi Arabia and Iran, which have intensified over the past several years, explained Alkadiri. Saudi Arabia blames Iran for much of the instability along its borders and fears that a powerful Iran will become even more disruptive if it is able to export its influence and push its agenda at the expense of Saudi interests.

Strategically, it is in Saudi Arabia's best interest to keep oil prices low. Such a move would deny Iran the ability to fund or support groups that would be hostile to Saudi dominance. But low oil prices will also impact the governments of countries like Iraq and reduce their governments' efforts to control internal ethnic and tribal strife.

In the short-term, the Iran deal has created volatility in global oil prices. After the deal was announced, oil prices fell before recovering once the markets realized Iran would not be bringing material volumes oil to market any time soon. When that might happen is a key focus now, explained Jamie Webster, director of downstream research, IHS Energy.

There is still a massive oversupply of crude oil in the global system, he said, especially with Libya recently adding 600,000 barrels to the market. While there is slightly higher global demand-1.1 million barrel per day in 2015, up from the 600,000 that we saw in 2014-it has not increased enough to shift the supply-and-demand dynamics.

As a result, Webster said, IHS believes that the potential for Iran to bring oil to the market-albeit not until 2016-adds to the overall downside pressure on the market.

Energy: A Turning Point

A new IHS Energy client webcast series in the footsteps of Oil: The Great Deflation under the new program name Energy: A Turning Point is scheduled to begin Monday April 27 with highlights from CERAWeek and Discussion of Critical Issues for the Energy Industry. Dan Yergin and Roger Diwan will share the highlights from our IHS CERAWeek conference and launch our coverage of the recalibration we are now seeing in the energy industry.

By Staff Writer April 10, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.