This Ill-Conceived, Ill-Timed Iran Deal

 | Nov 25, 2013 | 10:38 AM EST
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Today's report of an Iran deal, in which the Iranians agree to arrest the development of their nuclear capability, has already had a significant effect on the oil market. But what will be the continuing effect of this ill-conceived relaxation of sanctions?

Going into this weekend's negotiations in Geneva, there had been strong protest against any kind of compromise deal with Iran. Republicans here in the U.S., as well as the Israelis and the Saudis, have expressed dismay at the timing of negotiations and a deal. What was clear from the Iranian request for negotiations is that sanctions, after years of application, were finally working.

That's because the greatest negative effect on Iran hasn't come from the trade embargo. What's been so economically debilitating has been the strong fencing around banking activity that finances Iranian commerce. Not only were U.S. banks forbidden from it, but any foreign bank doing business with the Iranians had been barred from U.S. government business. This had put legitimate Iranian oil export at a virtual standstill, even as perhaps 600,000 barrels a day of Iranian crude were still dribbling out through bartered or cash deals.

The Obama administration will claim that this deal hasn't enacted a change in the daily 1-million-barrel export limitations on Iran, but don't believe them. The relaxation of financial constraints is what will really embolden the Chinese and Indian banks into slowly beginning to do business with the Iranian oil brokers once again. You can bet that this deal has now shattered the solid discipline against Iranian commerce that had brought Iran to the bargaining table.

For the Iranians, while they may have to wait a bit for the new financing to arrive, there is a massive amount of "liquid money" to release into a shriveled economy. Almost 100 million barrels of excess stockpiled crude, and another possible 1.2 million barrels a day of production potential, can almost immediately be restored -- with the right export deal in place.

That export potential is having a moderate effect on the Brent crude market this morning, as Brent is down by a little less than $2 per barrel. But it will likely have a stronger downward effect as the sanctions begin to ease.

What we cannot predict yet is what the reaction will be from the Saudis. With full production of more than 10 million barrels a day, that country has the swing barrels that could make the increased Iranian export virtually unnoticeable to the global market. But, with their dismay toward this agreement, there is a small chance that they might go the entirely opposite way, engaging in a price war and glutting the market to limit the economic gains of their Iranian rivals.

For the stocks connected to the oil market, you'll find initial suffering among the European and multinational integrated stocks that rely upon Brent pricing. Watch for a small pullback in shares of BP (BP), Shell (RDS.A) and Total (TOT).

More likely to suffer in the long haul will be the refining stocks, which had been benefiting from a very strong spread between West Texas Intermediate and Brent. But those stocks will likely come back a little, given the prospect of new Euro Asian barrels from Iran slowly percolating into the market.

The ultimate result of the Iranian detail will depend upon the strength of enforcement of the U.S. coalition, which is difficult to predict -- and the Saudi reaction, which is equally difficult to predict.

For now, it doesn't make sense to restructure your energy portfolio based on this agreement. But restructuring your political portfolio based on the stupidity of this ill-timed and lightweight arrangement with the most dangerous regime in the Middle East?

That, I heartily recommend.

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