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Stock Analyst Update

What the Iran Deal Exit Means for Oil

President Trump's decision to abandon the Iran nuclear accord could exacerbate the global supply shortage.

President Trump’s decision to abandon the Iran nuclear accord is likely to widen this year’s crude oil supply-demand imbalance, accelerating the decline of global inventories and potentially leaving the market with fewer days of supply on hand by year-end than it has had at any point in the past eight years. The possibility of withdrawal was well telegraphed by the administration, supporting a strong rally in crude prices in the past few months. This implies that a portion of the risk was already priced in, although further appreciation is likely now that the decision has been confirmed. Both WTI and Brent closed yesterday in the red but were on track for more substantial losses before the announcement from the White House.

The announcement is likely to send entirely the wrong message to U.S. shale producers, especially if prices do ratchet higher as a result. The WTI benchmark is already more than 25% above the marginal cost of supply, and there are at least 100 more tight oil rigs in service than necessary to balance the market in the long run. U.S. growth has been sluggish in recent months because of labor and equipment shortages, but these are temporary barriers and investors should not count on them to hold back the industry indefinitely. Lower prices are required--sooner or later--to incentivize a slowdown in the shale patch and avoid transforming the current supply shortage into a painful glut. If Iranian output falls, this danger could stay masked for longer and worsen the shale onslaught when it finally arrives.

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