As President Barack Obama and new Iranian President Hasan Rouhani converge on the United Nations on Tuesday, energy market watchers are asking whether recent conciliatory gestures from Iran are genuine—and what they could mean for global oil.
Experts who spoke with CNBC said that Iran's efforts at some sort of rapprochement appear to be real, and for two very practical reasons: It's being economically strangled more than ever by coordinated, international sanctions, and it's staring at a credible U.S. threat of force over its nuclear program.
A highly anticipated, though officially unplanned meeting between the two leaders failed to materialize Tuesday when Rouhani was a now-show to a UN luncheon. But the new administration in Iran is giving the country the opportunity to reassess its foreign policy, and in effect to acknowledge that its attempts to counter sanctions have largely failed.
Rouhani wrote in an op-ed last week that world leaders "are expected to lead in turning threats into opportunities." He recently said as well that Iran will never develop a nuclear weapon, a statement Obama cited Tuesday as a sign of progress between the two countries.
Iran depends not only on oil revenue to sustain the political status quo, but also on foreign investment to maintain the domestic oil industry itself. Billions of dollars in foreign investment are required for the country's exploration and development efforts.
"These heavy costs have been an important motivation for Iran to seek a settlement to its nuclear dispute with the West," Nader Habibi, Henry J. Leir professor of the economics of the Middle East at Brandeis University, told CNBC.
In the past, Iran could significantly mitigate the effects of sanctions by realigning its trade and relations from the West to Asia. Once the sanctions became more multilateral in 2012, however, they began to choke the Iranian economy. Some experts have drawn parallels between Iran's current conundrum and the coordinated sanctions that helped dismantle South Africa's apartheid system in the early 1990s.
"We don't know what has motivated the seeming change of attitude, and don't know if that also represents a change of policy," Jeffrey Schott, senior fellow at the Peterson Institute for International Economics, told CNBC. "What we do know is that sanctions have contributed to a sharp decline in the volume of Iranian oil exports, exacerbating Iran's fiscal difficulties."
Sanctions have removed a considerable flow of crude oil from global supply. The last time Iran filed data with the Joint Organisations Data Initiative, a global database that tracks oil markets, was in May 2012. At that time, Iranian exports amounted to 1.88 million barrels per day, already the lowest level in 11 years. An even more somber assessment came from the U.S. Energy Information Administration earlier this year, which estimated Iranian exports of crude and lease condensate fell to some 1.5 million bpd in 2012, compared with 2.5 million bpd in 2011.
But the possibility of reconciliation between the United States and Iran is more than just a 1 million bpd question for global oil markets. Tangible U.S.-Iranian rapprochement would also reduce the geopolitical risk premium, long dominated by the prospect of a pre-emptive strike on suspected nuclear facilities and the threat, however remote, of a closure of the Strait of Hormuz.
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"Anything that reduces the tensions will certainly help oil prices move lower. We've already had the Syrian premium coming out of the market," said Addison Armstrong of Tradition Energy. He added that the return of some Libyan oil is also weighing on prices.
"The Iran premium I've got to believe that it's somewhere around $10 a barrel," he said.
Others dispute the idea of a risk premium hanging over markets. Trevor Houser, partner with Rhodium Group, said the signs of a thaw in relationships are not enough to move the price of oil much.
"I wouldn't expect much of a drop in the price of oil just because of the diplomatic outcome. The Iran premium that's in the price right now has been the actual reduction in supply," he said. "It will take an act of Congress to remove the sanctions."
Congress voted for the sanctions, toughening some even beyond what was sought by the Obama administration.
While a decline in global prices may come as a result of detente between the U.S. and Iran, it wouldn't happen until Iranian oil was entering the market, said Jan Stuart, who heads Global Energy Research at Credit Suisse.
"The real breakthrough would be for there to be more oil available," Stuart said. "For it's only when there's more oil available that global balances (which were extraordinarily tight in the third quarter) will relax—and even then, supplies that the Saudis and others had raised to respond to a lack of oil from Iran, those supplies could then be shut in again."
And then there's the political reality. A genuine easing of U.S.-Iranian tensions faces serious obstacles.
This would not be the first time U.S.-Iranian tensions have cooled somewhat, only to heat back up. Formal sanctions against Iran were first adopted by President Jimmy Carter in 1980. Following more sanctions in response to state-sponsored terrorism and Iran's alleged pursuit of weapons of mass destruction in the 1990s, reformist president Mohammed Khatami was able to persuade the U.S. to scale back restrictions. But relations deteriorated again, most vividly when President George W. Bush added Iran to his "Axis of Evil" in 2002.
Despite the possible benefits of an improved relationship, powerful political and religious interests within Iran still see direct dialogue with the United States as unacceptable. Abandoning or curtailing its nuclear program, a national goal pursued since the 1980s, would not be well received among more conservative Iranian factions.
"There is always a risk that hardliners try to derail the negotiations, but the probability of such an attempt at present is small …because even the hardliners are aware that the continuation, and possible escalation of sanctions, is very costly," Habibi said.
Iran is running out of time. A rational analysis would suggest that these political gestures are real, as they serve a mutual interest. However, logic and reason are a bold assumption in international political affairs.
—By CNBC's Yousef Gamal El-Din. Executive News Editor Patti Domm contributed to this report.