Tough sanctions against Iran in the past two years have slashed exports from the Opec member by more than half and cost Tehran billions of dollars in revenue losses a month, keeping Brent above $100 per barrel despite weak global demand.
The deal, which halts Iran’s most sensitive nuclear activity, also suspends sanctions by the US and the European Union on several other sectors of Iran’s economy for an initial six-month period.
“What really concerns the market is what will happen after the six-month period, when more Iranian crude could flood the markets,” Reuters quoted Phillip Futures investment analyst Chee Tat Tan as saying in Singapore.
Brent fell the most in more than three weeks to as low as $108.31 per barrel, and was trading down $2.45 at $108.60 by early Monday morning. US oil slipped to as low as $93.64, and was down 81 cents at $94.03.
“When the US market opens, we expect a further fall in Brent and to a lesser extend in WTI,” Tan said, predicting Brent prices may fall to around $107 per barrel this week.
Others said a further drop in oil was unlikely until more details emerge on the agreement, with major factors influencing the market such as worries over when the US will curb its monetary stimulus and outages in Libya.
“Prices are reacting to the historic deal because it takes some of the risk premium out,” Reuters quoted OptionsXpress market analyst Ben le Brun as saying in Sydney.
“But this news is hot off the press, and so there is some knee-jerk reaction. Oil may not fall much from here and we may see some paring back of losses,” he said.
The relief, which the US State Department said is “limited, temporary, targeted and reversible”, would allow about $4.2 billion of revenue from oil sales to be transferred in instalments from accounts frozen in the West if Iran fulfils its commitment.
“I think the United States has been very liberal in the negotiations, and it shouldn’t be a problem for Iran to meet the terms,” Phillip Futures’ Tan said.
Apart from the revenue loss from reduced oil exports, Iran has billions of dollars stuck in banks in countries which buy its oil because the sanctions have cut off transfer facilities.
The White House estimated that Iran had lost more than $80 billion since the beginning of 2012 because of lost oil sales. It also estimated that Tehran’s earnings over the next six months would be $30 billion down compared with a six-month period of 2011, before sanctions were imposed.
But sanctions that prevent energy companies from investing in Iran, and have slashed its oil exports to around 1 million barrels per day from 2.5 million bpd, remain in place.
“The market will probably want to see the nitty-gritty details of the agreement before we see any further significant declines in prices,” Le Brun said.
Further declines were also stemmed by reduced oil shipments from Libya. Exports have been running at a fraction of the levels seen earlier this year of more than 1 million bpd and the government is struggling to cope with protesters who have taken over eastern oil ports and a western terminal in pursuit of political demands for more rights.
Investors will also look at a raft of housing reports from the US to gauge the country’s economic outlook. The Fed’s last policy meeting suggest officials are preparing to reduce the pace of bond-buying in coming months as long as the economy continues to improve.
The Fed’s massive asset-purchase programme has been a key driver of investment in global commodities.