A deal to remove US sanctions on Iran's oil and other energy exports still remains the consensus view among analysts, but the possibility of talks collapsing has started to grow with the delays.
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The oil market would lose up to 1 million b/d of incremental supply growth through early 2022 if an Iran deal is significantly delayed or the talks get derailed altogether, said Paul Sheldon, chief geopolitical adviser for S&P Global Platts Analytics.
"This would in turn raise demand for OPEC+ spare capacity and make it easier to maintain the framework of the group's current production agreement," Sheldon said.
A seventh round of talks over rejoining the Joint Comprehensive Plan of Action has yet to be scheduled and might not happen until after Iranian President-elect Ebrahim Raisi takes office in August.
The EU-brokered talks last met in Vienna in mid-June. When the negotiations started in April, many analysts expected the sides to reach a swift deal by the end of May.
US State Department spokesman Ned Price said July 13 that Iran must answer "when or whether" it is prepared to start a seventh round of talks, as the US is "prepared to continue engaging" in the negotiations.
"We've been equally clear that there's not a firm deadline that we have in mind," he said. "But we've made no secret of the fact that we are considering the implications of Iran's nuclear advances for a potential return to the JCPOA. So, we're watching very closely."
Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, said a no-deal scenario tightens the oil market outlook for early 2022 and would increase global reliance on OPEC's Gulf states, Iraq and Russia for incremental supply as demand picks up.
She said the market has probably priced in no new Iranian barrels for the rest of 2021, but not beyond that.
Ziemba sees two no-deal scenarios: one where talks drag on into 2022 and another where "they give up on a deal, and US enforcement of smuggling increases as all hope of a deal recedes."
"This increases the risk of supply volatility," she added.
Fernando Ferreira, Rapidan Energy Group's director of geopolitical risk, said a breakdown in talks would bolster the bullish case for oil as the Biden administration would likely resume implementation of oil sanctions against Iran that have been set aside to avoid derailing negotiations.
"Traders would also have to factor in a higher geopolitical risk premium as Iran is likely to resume provocations around Hormuz to build leverage," he said.
Ferreira said his sense is that a deal is "mostly done, and negotiators only need a nod from the supreme leader to wrap things up."
"Negotiations are likely to move pretty quickly once that happens," he said.
Waiting for unsanctioned barrels
Matthew Reed, vice president of Foreign Reports, said the latest delays might indicate Iran's Supreme Leader Ali Khamenei wants to let President-elect Raisi take credit for the economic benefits of the sanctions removal instead of outgoing President Hassan Rouhani.
"He's going to let his protégé take all the credit for reaching a deal and all the future rewards that come with it, even though Rouhani did all the hard work to negotiate it," Reed said by email.
Reed still sees good odds of a deal in the coming months.
"But the first barrels of unsanctioned Iranian crude probably won't hit the market until Q4 at this rate," he said. "Some of Iran's customers say it'll take another quarter or so after sanctions are lifted for them to feel comfortable buying again. If that's true, [Iranian production] might not reach capacity until the middle of next year."
Kevin Book, managing director of ClearView Energy Partners, said in a July 6 note to clients an imminent deal is still likely, but several "inauspicious recent developments" on both sides make it impossible to rule out that talks might stall or collapse.
Book pointed to the unscheduled seventh round of talks, the International Atomic Energy Agency's lapsed technical understanding with Iran on nuclear monitoring, and pessimistic comments by US Secretary of State Antony Blinken, among other factors.
But Book said both sides continue to have strong motivations for reaching a deal, including the US wanting to cool the risks of regional conflict, and Iran returning its full 2.5 million b/d in production capacity and reclaiming nearly $100 billion in oil sales revenue from frozen overseas accounts.
Structural and political factors still make a deal likely despite the delays, wrote Eric Brewer, a senior fellow at the Center for Strategic and International Studies, and Henry Rome, a senior analyst at Eurasia Group, in a recent column for War on the Rocks.
"But while each side may profess a desire to return to the nuclear deal, there is still significant uncertainty and room for error," they wrote. "The longer this drags on without resolution, the greater the risk that the Joint Comprehensive Plan of Action as we know it will no longer be salvageable."