Iran could be on the brink of caving in to international pressure to end its nuclear program, after a painful oil embargo. As much as 1 million barrels per day of Iranian crude could eventually return to markets if an agreement is reached, leaving some analysts pondering the impact of renewed exports on global pricing.

A thawing of relations between the West and Iran is under way. At an early November stop in Geneva, Switzerland, Secretary of State John Kerry said a deal with Iran hasn't been ironed out. He said a group of world powers known as the P5+1 is “doing some very important work right now, and I'm delighted to be here … to see if we can narrow some differences.

“I don't think anybody should mistake that there are some important gaps that have to be closed.”

Along with other factors, oil prices could be in flux if exports resume. A predominately lower price range due to North American production and Iranian exports would have implications for E&Ps' cash flows and capital-spending budgets, says Bill Herbert, managing director and co-head of securities for Simmons & Co.

“To this point, we've been surprised by the complacency on the part of the Street, as well as oil-service management teams, with regard to the unfolding drama in crude,” Herbert says.

Iran has been compelled to sit down at the negotiating table after a year of pain from the Western oil embargo, says Scott Gruber, senior analyst with Bernstein Research.

Oil exports make up 80% of Iran's total export earnings and 50% to 60% of its government revenue, according to the US Energy Information Administration (EIA).

Iran's exports of crude oil and lease condensate declined to about 1.5 million barrels per day in 2012, compared with 2.5 million in 2011, and have continued to tighten in 2013. The loss of revenues from oil and Iran's exile from the international banking system have caused its currency value to drop sharply and inflation to rise more than 50%, according to a report by the Congressional Research Service.

“While it's far too early to see the potential outcome of the current negotiations, the prospect of easing tensions in the Middle East, at least between Iran and the West, has re-energized the crude bears,” Gruber says.

Lifting of the Western oil embargo against Iran and the re-

sumption of exports by Libya could further worry traders and investors. However, Gruber is doubtful crude prices will alter dramatically. The downside risk to crude “even in an extreme reactivation scenario is less than what appears at first glance.”

The International Energy Agency (IEA) says OPEC spare production capacity stands at 2.9 million barrels per day, or 3.2% of global demand. Effective OPEC spare production capacity eliminates unreliable sources, including Iraq, Nigeria, Libya and Iran. Current spare capacity is down 900,000 barrels per day since the beginning of the year and almost 50% below the recession high of 5.7 million barrels per day in 2009.

Gruber says historical relationships predict that crude trades at a 9% premium to marginal cost. At a marginal cost of $95 a barrel, $100 West Texas Intermediate (WTI) would be “fully justified, if not a few dollars light.”

However, increased production from Iran and Libya may pose the greatest risk to crude prices assuming full resumption in exports. “Our model points to crude price downside of 9%,” Gruber says. “In the unlikely scenario that this is compounded by a full resumption in exports by Libya, our model points to 15% downside to crude.”

If Iran and Libya were to resume full production, WTI prices could fall into the middle $80s and Brent to the low $90s. However, that scenario assumes immediate resumption of exports or the growth of non-OPEC supply perfectly matching global demand as exports ramp up.

But Herbert cautions that the Iranian narrative is gaining more traction than is warranted at this stage.

“In the event Iran is eventually reintegrated into the community of nations, this will have a structurally positive impact with regard to global production flexibility,” he says. And, he thinks the Saudis like prices as they are.

“We highlight that Saudi controls nearly all OPEC spare capacity, is on record that $100 per barrel is a fair price, and needs about $85 per barrel to balance its budget,” Herbert says. “Saudi may choose to slow supply from the blistering 10-million-barrelsper-day pace it has maintained since the summer.”

—Darren Barbee