Crude oil came under renewed pressure Tuesday as Iran and six world powers announced they had reached a deal on Tehran's nuclear program. But Citigroup's head of commodities research played down the impact of Iran's potential return to the oil market, saying traders shouldn't expect much net price movement in crude futures.
"In six months we think we'll be at exactly the same level we're at now. It'll maybe go up a bit in the third quarter," Edward Morse told CNBC's "Squawk Box."
"How far down could it go? We'll repeat what we've said before. If nothing gives, production will have to be shut in through the price mechanism, and it will take $40 or lower WTI to get to that level," Morse said.
The nuclear agreement reached this week would limit Iran's nuclear capability and roll back economic sanctions after the country's leaders come into compliance with the terms of the accord.
Iran could begin putting oil back into the market about two months after the International Atomic Energy Agency certifies Tehran's nuclear program, Morse said. Iran's oil minister has said Iran can produce 1 million barrels per day within six months.
"Nobody who looks seriously at that believes either that the market can absorb that amount, or that Iran can produce it," Morse said. "We're thinking realistically about three, four or 500,000 barrels a day. Maybe 200[,000] or 300[,000] at the beginning and then growing over the course of 2016. It's certainly a 2016 event."
A Reuters poll of 25 oil analysts from leading banks and brokerages forecast Iran would be able to raise crude oil output by 250,000 to 500,000 bpd by the end of this year and by up to 750,000 bpd by mid-2016. The global crude market already has a 2.6 million barrel-per-day surplus.
As for the estimated 40 million barrels of oil sitting off the coast of Iran in tankers, Morse said only about one-third of it will create overhang in oil markets because the majority of it is condensate or condensate-blended crude.
"The condensate can be exported under the sanctions regime," he said. "So the question is why is it not being exported, and the answer is almost certainly that it is so high in sulfur content that no refiner anywhere in the world wants to take it on, except perhaps at a very steep discount."
Price action will be determined by a multitude of factors, including U.S. production and world economic growth.
Citi forecasts U.S. production will be flat to slightly negative, but given the recent resumption in drilling, it could rebound, Morse said. After more than seven months of declines, drillers added oil rigs to U.S. fields in the last two weeks.
The bank projects global GDP is currently growing at just 2.6 percent, weighed down by recent developments in China, Morse said.