Iran nuclear talks: the oil price fallout

Iranian President Hasan Rouhani.
Kaveh Kazemi | Getty Images

Iran's "constructive" talks with the United Nations about its controversial nuclear program sent the oil price down on Friday, but short-term volatility in oil is far from over.

The upheaval in the Middle East has always had an impact on everyday life around the world through its effect on the price of oil.

With military intervention by the Western powers in Syria a receding threat, and Iran and the U.S. engaging in the most high-profile talks for a generation, you could be forgiven for thinking there was a case for a sustained fall in the price of Brent crude.

During the increase in tensions following the chemical attack on rebel strongholds in Syria, the price of oil rose around 10 percent to above $115 a barrel. But as the threat of action against Syria receded and Iran stepped up its détente, the price has dropped more than 6 percent, trading below $109 on Friday.

(Read more: Deal reached over Syrian chemical weapons)

Yet there is still a bullish case to be made for the cost of oil – and it lies in the Middle East's "resource curse", according to analysts at Citi.

The effect on the price of oil from improving international relations and new fields coming on stream – such as in Iraq and Kazakhstan – in some parts of the Middle East could be mitigated by supply problems in other parts of the region, the analysts found.

(Read more: Iran and the U.S. optimistic after rare encounter)

The recently elected President of Iran, Hassan Rouhani, who so far has appeared more conciliatory than predecessor Mahmoud Ahmadinejad, has caused some oil analysts to speculate that sanctions against Iranian oil may be relaxed or even lifted.

While reliable figures on Iran's economy are difficult to come by, the International Monetary Fund (IMF) has reported that the country is in the grip of a recession -- which may explain the need for improved foreign relations.

If Iran's oil capacity was to come back into the market – about 1 million barrels a day, according to analysts at Bank of America Merrill Lynch -- the supply shock could reduce prices by $20 per barrel. But Iranian infrastructure issues could mean a short supply -- even if diplomacy brings its oil back to the market.

"With limited access to foreign capital, a major government funding problem, a collapsing currency and a theocratic political system, it may take years to bring Iranian oil output back to pre-sanction levels," BoAML analysts wrote.

They concluded the negative impact could be as little as $10 per barrel.

(Read more: What Iranian olive branch might mean for oil)

Even if the situation in Iran and Syria improves, there are plenty of other factors in the region which could drive up the cost of oil.

For example, major producer Saudi Arabia could reduce its output to buoy prices. Plus, the system dominated by the Organization of Arab Petroleum Exporting Countries (OPEC), which helped maintain relative stability in the region for the four decades up to the Arab Spring, has broken down, according to analysts at Citi, who raised their Brent price forecast for 2014 from $99 to $108.

"The Arab Spring that started in late 2010…has left a vacuum of political leadership in countries like Libya, and the result is a sectarian grab for resources and power, with oil infrastructure often being held hostage as a negotiating tactic," they wrote.

The continuing sectarian violence in Libya, Iraq and Egypt is also causing concern that sectarian divisions between Sunni and Shia Muslims in the region are becoming more entrenched.

"The Middle East in recent years has not been very kind to optimists," Citi analysts pointed out.

By CNBC's Catherine Boyle. Twitter: @cboylecnbc