What would an Iran nuclear deal mean for oil prices?

Oil prices fell by more than 4% at one point on 2 April, as world powers announced they had reached an agreement on the outlines of a deal that would limit Iran's nuclear programme in return for sanctions relief.

Six world powers have negotiated with Iran for months in a painstaking bid to reach an agreement that would see economic sanctions on Tehran lifted in return for controls on Iran's nuclear deal.

Ministers are still working on technical aspects of the deal but the joint statement issued on Thursday proves that enough progress had been made that talks would continue until a final deadline of 30 June.

If sanctions on Iran are lifted completely on this date, it would have dramatic implications on oil prices. Iran is a major oil producer but companies have been banned from doing business with Iranian oil producers since 2006, after the United Nations imposed sanctions. (The US had already imposed sanctions on Iran in 1979, which it later tightened in 1995.)

Short-term volatility

The prospect of sanctions on Iran being lifted has already had a short-term impact on the market and this volatility is expected to continue in the medium term.

"The first couple of months are likely to be quite volatile," Thomas Pugh, commodities economist at Capital Economics, told IBTimesUK.

Iran has plenty of oil in storage that it could export as soon as sanctions are lifted, so a green light would likely lead to an immediate spike in supplies. Such a move could see prices drop by as much as $10 or even $20 a barrel in the short term, although this would likely bounce back soon enough, Pugh said.

Long-term pressure on prices

While it would likely take Iran more time to restart its oil exporting infrastructure in the event of the sanctions being lifted, it could eventually get an extra million barrels of oil per day on the market.

"Iranian oil production is about a million barrels a day lower than it was before the sanctions. If you release all the sanctions, eventually that's the kind of figure you'd be looking at coming back to the market," Pugh told IBTimesUK.

Compared with 2014, the oil market is much better supplied and prices have fallen by half since June of that year. If a new wave of Iranian oil were to come on to the market in June 2015, it would add to the supply glut and could weigh further on prices in the long run.