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Oil prices may be losing Iranian 'risk premium'

Wednesday, 6 Nov 2013 | 5:25 PM ET
Iran's ambassador to the International Atomic Energy Agency, Reza Najafi.
Alexander Klein | AFP | Getty Images
Iran's ambassador to the International Atomic Energy Agency, Reza Najafi.

One of several factors contributing to the sharp drop in global oil prices in recent months has been optimism about a deal over Iran's nuclear capabilities. Despite Tehran's denials, fears the country is developing nuclear weapons has kept the international benchmark price for crude oil above $100 a barrel for nearly three years.

A new round of talks over Iran's nuclear program begins in Geneva on Thursday. Iran's top negotiator has said it is possible that there could be a preliminary deal as early as this week, which could have a dramatic impact on oil prices—and U.S. consumers.

"There's a $10-to-$15 'risk premium' in the price of oil, and it's been there for quite a while—just related to what's going on with Iran, its nuclear program and the West's reaction to it," said Addison Armstrong, senior director of market research at Tradition Energy, an energy management advisory firm in Stamford, Conn. "So any progress that they make that starts to take away some of that concern about Iran helps to lower the price of oil."

(Watch: America's oil independence)

Brent crude prices have tumbled more than $10 a barrel since late August—from $117 a barrel to near $105 a barrel on Wednesday.

International sanctions aimed at curbing Iran's nuclear program have halved the country's oil exports, which topped 2 million barrels a day at the beginning of 2012. But more moderate leadership from Iran's new president, Hassan Rouhani, who took office in August, has eased tensions and raised expectations that sanctions may be rolled back.

Commodities tomorrow: Oil & gas futures up
CNBC's Sharon Epperson discusses the day's activity in the commodities markets. Oil rose more than a dollar on the day, due to lower-than-expected inventory numbers. Gas was higher, as well, after a bigger-than-expected inventory draw.

In a few hours, Iranian negotiators will begin another round of talks with leaders from six world powers, known as the P5+1: Russia, China, France, Germany, the United Kingdom and the United States.

If negotiations are successful and sanctions are lifted, about 1 million barrels a day of Iranian crude may soon be back on the market. If that happens, some analysts say global oil prices could plunge as much as $15 a barrel. But that's still a big "If"?

"We give slightly better-than-average odds to an agreement in principle right now," said Kevin Book, who heads the research team at Washington-based ClearView Energy Partners, an international energy policy firm.

(Read more: Libya may deepen Brent's premium over US oil)

"There's a long way to go until we get some sort of concrete deal," Armstrong said. "But the most important thing is that there are confidence-building measures on each side."

Armstrong and Book agree that the change in tone from Iran and the West is what has been most surprising and reassuring in recent discussions.

"What we're seeing is an unprecedented enthusiasm on the part of the U.S. government, taking steps that haven't been taken in more than three decades," Book said. "It is unlikely to succeed immediately, but the trajectory has been, against all odds, to continue."

(Watch: Why Mark Fisher wants to buy oil)

Lifting Iran sanctions could have big impact on oil: Pro
Dr. Abhishek Deshpande, oil markets analyst at Natixis, says that there could be a downward outlook for oil prices if sanctions on Iran are lifted.

Even if an agreement is not reached immediately, "both sides seem to recognize that with this new president and new regime, there is a catalyst perhaps to some change in the way the two sides have gone about dealing with each other," Armstrong said.

The change in tone served as a catalyst in changing the perception of the "Iranian threat" to the oil market in the minds of many oil traders, they say, also helping to contribute to lower oil prices. Growing crude oil production in the U.S. and globally has also factored into the slide.

"Fundamentally, the oil market is weak to begin with. We're awash in oil not only in this country but around the world, so I'm looking to short it anyway, adding Iranian oil to the market only makes crude oil weaker," said GRZ Energy's Anthony Grisanti, an oil futures trader on the floor of the New York Mercantile Exchange, who is betting that oil prices will continue to fall.

Lower crude oil prices have already benefited American consumers. As Brent crude oil prices have plummeted nearly 10 percent since September, retail gasoline prices on average have plunged about 25 cents a gallon. According to AAA, the national average price for regular gasoline—at $3.23 a gallon on Wednesday—is the lowest price of the year.

—By CNBC's Sharon Epperson. Follow her on Twitter: @sharon_epperson

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