Oil hammered by historic Iran nuclear deal

Iran has agreed to curb its nuclear ambitions in return for the lifting of sanctions. An historic deal - the culmination of more than a decade of on-off talks - has been announced in Vienna, sparking a further slump in oil prices Tuesday.

Iranian negotiators have been locked in talks with the six P5+1 nations - China, France, Russia, the United Kingdom, and the United States, plus Germany. A deal paves the way for Tehran to flood the market with oil and begin generating much-needed revenue to repair its shattered economy.

Brent crude fell as much as 1.6% Tuesday to $56.42, taking the plunge so far this month to almost 11%. "Even a modest loosening of sanctions will supply more oil onto an already oversupplied market," warns oil industry analyst Malcolm Graham-Wood.

Iran holds the world's fourth-largest proved oil reserves, but it will still take time to get back to full production. Few expect the 2.3 million barrels a day (mb/d) of output within a few months as predicted recently by Iran's oil minister.

Source: TradingView

Clearly, the Saudis were anticipating some kind of deal. It pumped over 10.5 mb/d last month, breaking a record set 35 years ago. And it needs the money to keep major projects on track and bankroll military spending. In the past year, it has borrowed $4 billion from local markets and issued bonds for the first time since 2007.

Overall, Opec ramped up output by 283,000 barrels a day in June to a three-year high. That increase, however, comes at a time when supply continues to outstrip demand. Just last week, the International Energy Agency said global oil demand growth is forecast to slow to 1.2 mb/d in 2016 from 1.4 mb/d this year. Supply, meanwhile, surged by 550 000 barrels per day in June and world oil production hit 96.6 mb/d, up 3.1 mb/d on last year.

"Low oil prices are not only having a marked effect on commodity companies, but are also having a transformative effect upon economies around the world," said Rebecca O'Keeffe, head of investment at Interactive Investor. "While oil consuming nations benefit from a rise in household disposable income, oil producers are finding conditions increasingly difficult."

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Obviously, oil producers and oil equipment services providers are feeling the brunt of the sell-off. BP and Royal Dutch Shell have weathered this month rather well - both are flat so far - but are still nursing heavy losses since last summer's oil crash.

Indeed, the oil sector has lost a quarter of its value in that time, and prices are unlikely to bounce back any time soon despite the downturn in shale production.

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