London (Reuters) – Brent crude fell by as much as $3 a barrel on Monday before paring losses, as a breakthrough nuclear deal between world powers and Iran at the weekend eased oil supply fears.
Tough sanctions against Iran in the past two years have slashed exports from the Organisation of Petroleum Exporting Countries (OPEC) member by more than half and cost Tehran billions of dollars a month in revenue losses, keeping Brent above $100 a barrel despite weak global demand.
The deal halts Iran’s most sensitive nuclear activity and also suspends sanctions by the US and the European Union on several other sectors of Iran’s economy for an initial six-month period.
“It will take a while before we have the full lifting on the sanctions on Iran but you can expect that, if they go through another interim deal over the next six months, there will be further lifting on the sanctions,” Petromatrix’s Olivier Jakob said.
Brent was trading down $2.15 at $108.90 by 10.40am GMT, after slipping $3 to hit a low of $108.05 earlier in the session. US oil fell $1.35 to $93.80.
The relief, which the US state department said was “limited, temporary, targeted and reversible”, would allow about $4.2bn of revenue from oil sales to be transferred in instalments from accounts held by oil-importing countries if Iran fulfils its commitment.
Apart from the revenue loss from reduced oil exports, Iran has billions of dollars stuck in banks in countries that buy its oil because the sanctions have cut off transfer facilities.
The White House estimates that Iran has lost more than $80bn since the beginning of 2012 because of lost oil sales.
It also estimates Tehran’s earnings over the next six months will be down $30bn compared with a six-month period in 2011, before sanctions were imposed.
The head of the International Energy Agency said on Monday it would be difficult for Iran to revive its oil output to former levels quickly even if international restrictions on its exports were lifted.
But an easing of the ban on European shipping insurance may help smooth Iran’s crude exports to its big Asian customers.
“Those sorts of steps, at the margins, do make it more attractive, or at least less problematic to ship Iranian crude. It opens a chink in stopping Iranian crude getting out,” Deutsche Bank’s global head of commodity research, Michael Lewis, said.
A tough road now lies ahead for President Barack Obama and other global leaders to turn the interim accord with Iran into a comprehensive agreement.
“Key groups remain suspicious of the reset in relations and contend that the Iranians got the much better end of the Geneva deal,” Barclays analysts said in a note to clients.
Israeli Prime Minister Benjamin Netanyahu denounced the deal as a “historic mistake”. Mr Obama also has to sell the accord to sceptics in Congress, including some in his own Democratic Party, who have been pressing for more sanctions on Iran.
Oil prices may, however, find a floor as sanctions that prevent energy companies from investing in Iran and have slashed its oil exports to about 1-million barrels a day from 2.5-million barrels a day remain in place.
Lower oil shipments from Libya, which remain disrupted by protesters seizing shipping ports and have been running at a fraction of the levels seen earlier this year of more than 1-million barrels a day, will also underpin prices.
Investors are now eyeing a raft of housing reports from the US to gauge the country’s economic outlook. Minutes from the Federal Reserve’s last policy meeting suggested officials were preparing to reduce the pace of bond-buying in coming months as long as the economy continued to improve.
The Fed’s asset-purchase programme has been a key driver of investment in global commodities.
Mr Jakob said that 2014 was going to be “the year of the double taper”.
“You have to look forward to the tapering by the US Fed, but also for the tapering of the sanctions on Iran.”