Energy Stocks and Oil Fall on Iran Sanctions Deal

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  )  has dropped about 100 points, to 16,339, in early afternoon trading.The S&P 500  (SNPINDEX: ^GSPC  )  was down 12 points to 1,830.

Energy stocks are also down after world powers finalized a preliminary deal with Iran on Sunday to ease some sanctions in exchange for the Middle Eastern state slowing its contested nuclear program. West Texas Intermediate crude is down 0.56% to $92.20 while Brent crude prices are down 0.2% to $107.05.

On Sunday, the five permanent members of the U.N. Security Council (China, France, Russia, the United Kingdom, and the United States) and Germany -- jointly known as the P5+1 -- agreed to reduce sanctions over the coming six months as Iran takes specific steps to pull back a nuclear program many suspect of being aimed at developing weapons. The deal was first announced in November but it has taken six weeks for all the details to be worked out. It will go into effect on Jan. 20

Iran agreed to within six months convert its entire stockpile of 20 percent enriched uranium into other forms, allow daily monitoring of its enrichment facilities by the International Atomic Energy Agency, and allow the IAEA access to its centrifuge production facilities. There have been mixed reports about whether the IAEA will be given access to Iran's Parchin military facility, which is suspected of having housed operations that could contribute to nuclear-weapon development. The parties also agreed on a six-month timetable to reach a final agreement, though the schedule can be extended six months by mutual consent.

Iran is still allowed to enrich uranium up to 5% for powering civilian reactors. It can also continue production of its current centrifuges and is allowed to continue research on advanced centrifuges.

In exchange for those concessions, the P5+1 agreed to give Iran access to $4.2 billion of oil revenue that is being held in foreign banks, contingent on Tehran following through on its agreement. The first payment of $550 million is expected to be released on Feb. 1, with the remainder distributed evenly over the five and a half months. The core sanctions on Iran's banking, energy, and shipping sectors will stay in place, while some sanctions on imports of car and airplane parts will be lifted. The agreement is expected to boost Iran's economy by $6 billion-$7 billion over the next six months. Iran's oil exports will still be limited to the six nations currently receiving Iranian crude (China, India, Japan, Russia, South Korea,and Taiwan). The P5+1 also agreed to suspend efforts to halt Iran's exports to those nations.

Many members of Congress are still skeptical of this deal, as is Israel. Israeli Prime Minister Benjamin Netanyahu reiterated at the funeral for former Prime Minister Ariel Sharon that his nation "will act in every way to prevent Iran from attaining the capability to arm itself with nuclear weapons," Some U.S. lawmakers are calling for increased sanctions against Iran, as they believe it is obvious the penalties were working. Iran has said the deal will be void if sanctions are increased, and President Barack Obama has said he will veto any legislation that increases sanctions.

It is estimated that sanctions have cost Iran $80 billion in lost oil sales just since 2012. They certainly succeeded in bringing Iran to the negotiating table, but it remains to be seen if they are effective in curbing the nation's nuclear program. Iran maintains its right to uranium enrichment, which it says is for civilian purposes such as energy production and medicine.

The sanctions on Iran are one of the key factors keeping oil prices high. Iran exports roughly 1 million barrels of oil a day, down from an average of 2.5 million a day this past decade. If Iran is fully allowed to export oil again, oil prices will drop -- assuming nothing else changes. Other key factors affecting oil right now are the depressed level of oil production in Libya and the possibility of civil war in Iraq.

While no one can know for sure where oil prices will go in the medium term, we do know that record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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