Calculus on oil price changing as Iran talks wobble

A file photo shows an Iranian worker at the South Pars field in the southern Iranian port town of Asaluyeh.
Atta Kenare | AFP | Getty Images
A file photo shows an Iranian worker at the South Pars field in the southern Iranian port town of Asaluyeh.

Iran has been a wild card in the oil market, and it looks like it could stay that way for awhile.

The deadline for a nuclear agreement with the U.S. and five other countries is Tuesday. But the timing appears to be slipping, as the walkup to that date has been met with negative rhetoric from Iranian hardliners.

"From a geopolitical standpoint, it could add a lot of uncertainty. From a short-term standpoint, I think the oil implications are that anyone who is thinking Iranian oil is getting to the market soon will have to reconsider," said Greg Valliere, chief political strategist at Potomac Research.

What that means for current oil prices is apparent, but the future impact is more complicated.

WTI Oil, 3 months

According to John Kilduff of Again Capital, if the talks are extended:

1. The estimated 30 million barrels of Iranian crude sitting on tankers will remain there for now.

2. Iran's plan to up production by 1 million barrels a day from a current 2.8 million will stay on hold, as it will not be able to collaborate with Western companies or export more oil.

In that case, the price impact will be minimal, and the market's sense that a deal is not imminent has already filtered through in slightly higher prices in the futures market.

Read MoreThe second largest U.S. oil producer is taking a hit

"At this point, the negotiations going south is probably worth $2 to $3 per barrel," Kilduff said. West Texas Intermediate futures were at $61.20 per barrel Wednesday, and have been trading roughly between $57 and $62 per barrel.

Strategists say the price of oil was supported by hardline comments Tuesday from Iran's Ayatollah Ali Khamenei.

The supreme leader demanded most sanctions be lifted even before Iran dismantles nuclear infrastructure or allows international inspectors to verify it is keeping its commitments. He also ruled out freezing nuclear enrichment for as long as a decade and reiterated a refusal to allow military sites to be inspected.

Complicating the situation, Iran's parliament on Tuesday passed a bill banning access by the International Atomic Energy Agency inspectors to those sites.

"I still think there could be a deal by late this year, and you could get oil in the market by the end of the year," Valliere said.

Read MoreUS crude inventories fall more than expected

However, there are heightened chances the deal will hit a snag.

"It's almost as if they're deliberately trying to provoke Congress. Even if there is a deal a few weeks form now, there's such a state of suspicion in Congress there's a chance that Congress could thwart this. [President Barack] Obama would veto any effort to thwart this, but there's a chance that veto could be overridden," he said.

Valliere said that gives higher odds to the idea that the talks break off completely, which would make Iran more aggressive in its efforts to build a weapon, creating an even more uncertain and unstable atmosphere in the Middle East.

If talks do fail, Israel could decide to take action on its own, but Valliere said the Obama administration would not support that approach. However, things would shift once a new president is in the White House, and whether it's a Republican or Democrat Hillary Clinton, a more aggressive approach to Iran would be supported.

Kilduff said if talks fall apart, the price of oil could immediately jump $10 a barrel.

"The knee jerk is going to be higher. Also I would assume relations will deteriorate between the U.S. and Iran, and maybe others, and that will raise the security premium for potential military action that Israel will push for," he said.

If the coalition falls apart, he said, Iran might also find willing buyers in China, or other parts of Asia for its crude.

"India and China already ramped up purchases. It's ready to go," he said.

The prospects for a June deal had been the most likely outcome the market expected just a few months ago, when negotiators were set to work out details on the framework of an agreement. But analysts varied on their expectations of when Iran could deliver its boatloads of oil to the market, or significantly ramp up production.

Gene McGillian, an analyst with Tradition Energy, said if a deal were reached, WTI would immediately test the bottom of its recent range at $57 per barrel.

"I think the market has grown so used to this question, that we're standing on the sidelines to see if anything could be done," he said. "Last month, as we got close to the deadline and there was positive sentiment, they were going to reach a deal, we did come under pressure."

But McGillian said knowing how the Iranians acted in the past, he expects the talks to continue but no deal would be reached without inspections.

"I think if the deal really is going to happen, the market could slide under $50 again ... and then we have to judge how the economy is doing and whether demand is going to go up," he said.

McGillian said the world is already oversupplied by 1.5 million to 2 million barrels of oil production a day, and ramped up Iranian output would add to the glut.