Brent crude oil prices dropped 2% this morning after Iran agreed to curb its nuclear activities in return for around $7 billion (£4.33bn) in sanctions relief.
Prices fell to $108.8 (£67.4) from $111.05 (£68.7) following the deal, according to energy expert David Hunter from Schneider Electric but recovered by mid-afternoon with Brent trading at around $109.50 (£67.7).
Mr Hunter believes the short-term effect is driven by “a perceived reduction in geopolitical tension”.
He added: “Any reduction in tension between the West and Iran lessens the risk of contagion to the wider Middle East while due to its location Iran can also threaten to close the Strait of Hormuz, through which 40% of the world’s traded oil flows.”
But the effect on physical supplies is less clear, he said: “Restrictions on Iranian oil exports still remain although there is a ‘roadmap’ in place which suggests that these curbs could be removed or reduced in six months should the rapprochement continue. This could release anything up to 1.5 million barrels per day (mb/d) onto the global market – however Iran’s membership of OPEC could limit the bearish effect on prices as Saudi Arabia could cut production to compensate.”
Mr Hunter added although the levels of Iranian supply will help reduce concerns over global supply tightness, he said “the Saudis have significant power to support the price and people should expect them to intervene should Brent threaten €100 (£83.6)”.
In November 2011, the US tightened restrictions against foreign firms and financial institutions trading in the fuel sector in Iran which prompted several countries to cut their imports.
Andrew Horstead, Head of Commodities Research at Utilyx believes the immediate impact of the deal on oil prices is likely to remain minimal.
He added: “The agreement, which sees Iran curbing its nuclear activities in exchange for a lessening of some sanctions, importantly does not include oil. The US White House has said that Iranian crude oil sales cannot increase over the next six months and will remain around 1mb/d.
“While the lifting of some sanctions does include the European Union ban on shipping insurance for tankers this is unlikely to increase the volumes of Iranian crude as exports are already around 1-1.1mb/d.”