Economy: Iran Treaty - A Needle Into The Oil Bubble?

(Drivebycuriosity) - This weekend the U.S. and other western powers reached an agreement with Iran to halt its nuclear program (nytimes). The New York Times and other media celebrated this as a landmark accord.

As I read the headlines this morning I hoped that this would be a break through in the Iran conflict and a needle in the oil bubble. Since around 2004 the Iran conflict has been keeping the price of oil high. The Iran sanctions reduced the supply of oil on global markets and made it more expensive. Speculation that the Iran conflict could escalate and disrupt the oil transports from the Middle East drove the commodity price even higher. Therefore the price of oil includes a risk premium. Brent Crude, the global oil future, its still north of $100 (in the moment of writing $110 boerse-go).  The high price for global oil (Brent) even impacts the US price of gas because US refineries use mainly imported oil. High energy prices are one of the reasons why the current economic upswing is so slow.

As I read the reports about the Iran deal I was disappointed. The sanctions against Iran still stay intact! (seekingalpha). Iran`s crude oil sales will still be limited to about 1 million barrels a day under international sanctions that remain in force as part of the nuclear accord reached in Geneva today (bloomberg).

"It’s a step, but it’s not like the end of a sanctions regime, not like it’s going to have a significant impact on the real balances of supply and demand for oil,” commented the U.S. bank Citigroup (bloomberg).

It is clear that US President Obama and the other Western politicians missed the historical chance to pop the oil bubble now. Clearing the sanctions would have flooded the global oil markets and reduced the price of oil significantly.  This would have been a boost for the ailing European economy and many emerging markets. It seems the politicians didn´t understand the problem or they didn´t care.

But there is hope. There is a chance that some air will leak from the oil price bubble. The treatment reduces the risk that the Iran tensions will escalate into a military conflict. Therefore the accord could reduce the risk premium on the price of oil. Maybe the Brent future will move below $100 in the coming days.