Oil Falls; Will it Last?
Iran has been under official sanction by the UN Security Council since 2006 after failing to acquiesce to Western demands that the Iranians stop all enrichment activity.
After nearly a decade of strict sanctions against Iran’s oil and finance industries, both sides came to the negotiation table over a year ago.
On one side, the U.S., France, Britain, Germany, China, and Russia worked to curb the proliferatory elements of Iran’s program, while the Iranians fought for their own autonomy in energy production.
Upon news of the deal, the market saw oil drop significantly.
Brent crude fell almost $3 per barrel, while West Texas Intermediate dropped 3.5% to $48 per barrel.
The reason for this reaction is simple…
Per the deal, sanctions against Iran’s oil industry would be lifted, which means Iran would be able to increase the export numbers you see above.
In an already flooded global market, news of the possibility of more oil sent prices down again.
While this is a completely plausible reason for oil prices to fall, the market fails to recognize that oil could actually go up because of this deal.
With Iran holding some more clout in the oil market in the Middle East, the nation will have incentive to grow production and exports.
Iran’s natural enemy by proxy — Saudi Arabia — may lose its gumption in an oil price war with the United States, Russia, and other OPEC producers.
Sure, the Saudis can withstand low oil prices until shale wells dwindle further, but with Iran, Russia, and the U.S. continuing production growth, Saudi Arabia may want to cut production, as a longer period of low prices will hurt revenues and cause budgetary problems for the Kingdom.
I realize this may sound counterintuitive, but while prices stand to fall in the short term, the long-term health of the oil market improves with a diversified set of major producers and exporters.
Ways to Benefit from an Iran Deal
By pushing short-term oil prices lower, the Iran deal gives us a great buying opportunity for oil stocks.
By no means am I suggesting you buy Iranian oil companies or speculative plays out of the Middle East. Instead, it would behoove you to find a constructive way to play a coming rise in oil exports and, eventually, prices.
Tanker companies authorized for American imports will be valuable, as will American midstream companies that are involved in the movement of refined oil products like gasoline and plain old crude oil.
The United States, still the biggest oil importer in the world, should now look to lift the export ban to remain competitive with global prices, as Saudi Arabia and Iran will both have a presence in the export market.
And midstream companies in the U.S. can expect to see a vast increase in business as more pipelines, refineries, and storage facilities are permitted and built to boost exports.
In a recent report, I vetted a midstream services company that has improved its business enough to garner an investment from my readers and me.
Its services will be instrumental in the development of midstream and oil logistics throughout the U.S., especially in places like the Permian, where shale oil production is rising despite the bear market.