Kemp: Prospect of Nuclear Deal is Already Weighing on Oil Prices

Lifting sanctions on Iran's oil industry could significantly change the outlook for oil supply and prices, the head of the U.S. Energy Information Administration told U.S. legislators.

"If and when sanctions are lifted, EIA's baseline forecast for world crude oil prices in 2016 could be reduced $5-$15 per barrel," Adam Sieminski said to the Senate's Committee on Energy and Natural Resources on Thursday.

The prospect of between 500,000 and 1 million barrels per day (bpd) of additional Iranian crude becoming available in 2016 or 2017, perhaps with even more by the end of the decade, is one of the biggest influences on the medium-term outlook.

While the price of short-dated futures contracts for Brent delivered in 2015 and early 2016 are now slightly higher than they were at the end of 2014, after a strong rally in recent weeks, prices for deliveries from June 2016 onwards have actually fallen.

Stronger nearby prices reflect the downturn in U.S. drilling and expectations that it will cut U.S. oil production in the coming months. But the drop in forward prices most likely reflects the impact of additional Iranian oil reaching international markets.

The entire Brent forward curve has pivoted, and the pivot point is the second quarter of 2016, which coincides with when most analysts think a nuclear framework could result in extra export volumes (http://link.reuters.com/qut54w).

Nuclear negotiators have until the end of June 2015 to hammer out the details of a "joint comprehensive plan of action".

Most observers think it will take a further six to 18 months to secure U.S. congressional approval, complete preliminary work by Iran and obtain a UN Security Council resolution.

Assuming it takes 12 months for all the necessary preparatory work to be done, extra Iranian crude would start hitting the international market from around June 2016, plus or minus a few months.

Lower Brent futures prices for the second half of 2016 and 2017 could be the impact of extra oil, discounted for the probability of a deal happening and sanctions being lifted.

Other factors are also having an impact on longer-dated prices, including the "fracklog" of drilled but uncompleted wells and the prospect that drilling will accelerate again.

But the extent and timing of higher Iranian exports is now one of the central drivers of prices in 2016 and 2017.

By John Kemp