Oil prices fell on Monday morning after Iran agreed the deal with world powers on its nuclear programme. As the market recovered, however, many traders are asking: why did they not move more?

The fate of Iranian sanctions, which have cut Iran’s exports in half over the past year and led Saudi Arabia to pump at unprecedented levels to fill the supply gap, has been a wild card for the oil market all year.

As US shale production booms, some analysts had tipped a breakthrough on Iran to push oil below $100 per barrel, providing welcome relief to a global economy labouring under high energy prices.

Instead, market reaction to the deal has been muted. Brent, the international benchmark, fell by almost $3 to $108.05 per barrel before recovering, with prices remaining several dollars higher than when negotiations began in Geneva last week.

“In normal market conditions, when such a huge cloud over supplies leaves the market, you would expect a much bigger reaction,” said Miswin Mahesh at Barclays.

Part of the explanation is simple: in the short term the deal will only have a limited impact on supplies. Most sanctions, including a ban on exports to the EU, remain in place and will not be lifted unless a final agreement is reached in six months’ time.

China, India, Japan and South Korea account for most Iranian sales, after the US granted them waivers from sanctions in return for gradually reducing purchases. They may now increase the amount they buy, but only slightly.

A suspension of transportation and insurance sanctions, which have made it difficult for refiners to arrange coverage for Iranian cargoes, will encourage those countries to purchase their full allotments. They will also be less concerned about reducing buying before the end of the year in order to win fresh waivers.

As a result Iranian exports, which had fallen to less than 800,000 barrels a day in October, are likely to recover: traders say they have been running at nearly 1.2m b/d again this month. Some of the 37m barrels Iran is thought to be holding in tankers at sea may also bleed into the market by the end of the year if buyers think a comprehensive deal is in sight.

“For the next six months we know we will have the maximum exports from Iran that are allowed by sanctions,” said Olivier Jakob, at the Petromatrix consultancy in Switzerland.

That is very different from supply growth, which the US government has explicitly ruled out. A fact sheet on the deal posted on the White House website says Iranian exports will be limited to around 1m b/d. “In the next six months, Iran’s crude oil sales cannot increase,” the document says.

The oil market has never been purely about supply and demand, however. The prospect of an Israeli strike on Iran’s nuclear programme, or Iran disrupting oil exports from the Gulf via the Strait of Hormuz, have added a geopolitical risk premium to the market.

Some analysts said that risk is receding somewhat. “One immediate change to the market is a reduction in the perceived long-term risk of a strike against Iran, a shift that has already brought prices down,” said Jamie Webster, a director at the PFC Energy consultancy in Washington.

But many are sceptical of whether the deal struck over the weekend can pave the way to a wider agreement in six months. “A key question is whether the current Iranian concessions are a floor or ceiling. If it is the latter, it will be very difficult to get the US Congress to go ahead with the deal,” said Mr Mahesh.

Mohammad al-Sabban, who was a senior adviser to Saudi Arabia’s minister of petroleum for more than two decades until last year, said he did not expect a comprehensive deal to be reached next year. “Negotiations may explode and go back to square one,” he said.

Some analysts have another explanation: that a slowly recovering global economy, rather than any fear of conflict in the Middle East, have been propping oil prices up.

Jan Stuart at Credit Suisse said the tempered market reaction on Monday showed simply that “these markets had very little ‘Iran premium’ built in”.

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