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Why Iran's Nuclear Deal is Bad News for Oil Stocks

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

It's a bad day for the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , which is down 1.1% at 3:30 EST. One reason for the sell-off was Atlanta Federal Reserve Bank President Dennis Lockhart saying he would support continued tapering in 2014 despite a weak jobs report last Friday. The market has generally reacted negatively in the short term to comments indicating more pullback to the Fed's stimulus efforts, but long term this shouldn't be a huge concern.  

The other big news item was a $53 billion federal budget surplus in December, helped by $40 billion in payments from Fannie Mae and Freddie Mac. For the first fiscal quarter (the fourth calendar quarter) the government's budget deficit fell 41% from a year ago to $174 billion.

In energy, oil is down about 1% today to below $92 per barrel after Iran and six world powers finalized a short-term agreement to curb its nuclear program, including via stepped-up U.N. oversight, in exchanged for reduced sanctions. Fellow Fool Dan Dzombak highlighted the details of the agreement, which don't yet allow the country to export oil to most countries, so I'll focus on what it could mean for the global energy picture.

Oil is all about supply and demand
One of the reasons Big Oil companies Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) are respectively down 1.5% and 2.1% today is the drop in oil, but longer term the concern is with global oil supply. Iran has the fourth largest proved reserves in the world and produced 4.2 billion barrels of oil per day as recently as 2011.  

Sanctions pushed Iran's exports from 2.51 million barrels per day in 2011 to just 1.53 million barrels per day in 2012 and forced it to sell to limited buyers for a discount. But allowing the nation back into the global oil trade -- a possibility, at least, should Iran agree to a more long-lasting nuclear rollback -- could add a significant amount of supply to the market. To put these figures in some perspective, below are the U.S. and worldwide production of crude oil in the last five years.

World Crude Oil Production Chart

World Crude Oil Production data by YCharts.

If Iran actually produces another 1 million barrels of oil per day we could see an impact on oil prices, particularly if the U.S., Libya, and western Africa continue to increase production. A 1% or 2% increase in global supply may not seem like a lot, but it will reduce prices and definitely limit upside for oil producers.

Time to get out of the oil game
Long term, the challenge for big oil producers such as Chevron and ExxonMobil is that oil is getting more expensive to extract and drivers simply aren't willing to pay an ever higher price to fill up their gas tanks. The result is falling margins, and another major supplier hitting the market would put even more pressure on oil producers.

It's these trends that create a reaction like today on an agreement that may not seem like a big deal at first. In fact, if you take a long-term view, Iran getting back into the oil trade (if it happens) could be a big deal for everyone in energy.

A better way to play energy than big oil
Increased oil production domestically isn't good for everyone, but it is great for some companies. The Motley Fool is offering a comprehensive look at three energy companies set to soar as the U.S. boosts output and we reveal them in 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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Travis Hoium

Travis Hoium has been writing for since July 2010 and covers the solar industry, renewable energy, and gaming stocks among other things.

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8/28/2015 3:14 PM
^DJI $16601.48 Down -53.29 -0.32%
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ExxonMobil Corp CAPS Rating: ****