Iran deal boosts fears of global oil glut
A historic deal to curb Iran's nuclear ambitions has fanned fresh fears on Wall Street of an oil glut.
The agreement announced Tuesday will lift crippling economic sanctions on Iran, paving the way for Tehran to boost its oil exports at a time when daily crude supply already is outstripping global demand. That would lead to lower oil prices.
Oil traders' knee-jerk reaction was to dump oil early Tuesday: A barrel of U.S. based crude, or West Texas Intermediate, tumbled more than 2.5%, But oil rebounded later in the day. WTI posted a gain for the day of $1.06, or 2%, to $53.26.
Oil prices plummeted by more than 50% from last summer's high before regaining some of those losses. Lifting sanctions on Iran would come at a time when Saudi Arabia is pumping record barrels of crude and amid continued strong production in he U.S.
Tuesday's price comeback was due in part to Wall Street betting it would take longer than initially believed for Iran to ramp up production and get its oil to market, says Quincy Krosby, market strategist at Prudential Financial.
"Traders aren't expecting a surge in supply from Iran" right away, Krosby says, adding that Iran will work with Western oil companies to build infrastructure and begin selling to Western markets as soon as it can. "With a market that is currently oversupplied, the ultimate supply addition from Iran should push prices lower, just not immediately."
Tuesday's price fluctuations were "puzzling" to Jack Ablin, chief investment officer at BMO Private Bank: "Perhaps energy investors are looking at the Iran deal from two perspectives. On the surface, the additional supply should help contain oil prices, although an empowered Iran heightens geopolitical risk, which has the potential to push energy prices higher."
Analysts estimate that as many as 1 million more barrels of crude could hit the market. Iran's exports were cut by about half due to the sanctions, imposed in 2012. Iran has the world's fourth-largest oil reserves: about 157,530 million barrels, or 10% of the world's proven oil stores, according to the Organization of the Petroleum Exporting Countries.
Sara Vakhshouri, an energy analyst at SVB Energy International, said oil prices can also be expected to drop because Iran has as much as 37 million barrels of crude in storage on tankers floating in the Persian Gulf.
Contributing: Kim Hjelmgaard and Oren Dorell.
Follow Adam Shell on Twitter: @adamshell.