Oil drops as Iran risk premium dissipates

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Brian Tracy

The oil complex (NYMEX:CLX13) is becoming more and more convinced that the Iranian negotiations with the P5 + 1 countries will make progress and as such oil prices declined across the board on Tuesday. Further pushing oil prices lower yesterday was skepticism that the U.S. politicians in Washington DC will not be able to come up with a deal prior to hitting the debt ceiling deadline on Thursday. I am still of the view that some sort of a deal will get done before the deadline.

Talks with Iran began on Tuesday with mostly positive comments coming from the early review of Iran’s proposal to the west. Iran indicated that it intends to continue to develop nuclear power… but not nuclear weapons and has offered their comments in a very conciliatory manner. Iran presented a proposal that took one hour that was a very detailed technical plan to resolve the standoff. A U.S. official said the discussions went well and will continue on Wednesday. The U.S. and Iran even had bilateral discussions on the sidelines of the talks for the first time in years.

Mr. Aragchi of Iran was quoted as saying Iran hoped to see the complete lifting of sanctions within six months and that Tehran had proposed a supervising committee consisting of the six major powers and Iran to monitor implementation of a deal.

"We should reach an agreement within a limited time frame so no one gets the impression that we are just killing time," he said. Speaking in Brussels, Russian Foreign Minister Sergei Lavrov said the six powers should offer Iran assurances that they aren't seeking regime change but want answers to questions raised by the IAEA, Russian news agency Interfax reported and the Wall Street Journal.

I am becoming more convinced that a deal will be reached this time and oil will once again begin to flow from Iran as sanctions are eventually lifted. This will be bearish for oil prices but I still do not expect a major collapse in prices rather a gradual shedding of the Iranian risk premium that has been embedded in the price for years.

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