The possibility of a rapprochement in nuclear talks between the US and Iran – though they did not produce a deal - had fueled a degree of oil market optimism about Iran’s reinstatement as a global oil supplier. But even if negotiations had proved successful, political and logistical hurdles would likely have stalled any significant return of Iranian grades to market.
An easing of Iran-US tensions, and any resulting influx of Iranian crudes into global oil markets, could both add to global supplies and reduce the geopolitical risk premium on oil prices. “The possibility of a quick return of sour, heavy Iranian exports would be welcomed by refineries which are already struggling on low margins having to source the well bid Iraqi Sour Kirkuk or Russian Urals grade of crudes,” wrote Barclays analyst Helima Croft in a note to clients this morning.
“The reopening of diplomatic channels and the prospect of a deal reduced the market risk premium associated with Iran’s relations with the West”, Croft added, noting that international concern over Iran’s nuclear program not only threatens regional stability, but also raises the specter of military conflict affecting major oil producing countries and oil transit choke points. Oil volumes shipped through the Strait of Hormuz averaged 17 million barrels per day in 2011, representing roughly 35% of all seaborne traded oil and almost 20% of oil traded globally, according to the Energy Information Administration.
But Croft pointed out that had recent negotiations proved successful, several obstacles would stand between an easing of tensions and bringing Iranian crude back to market. “Even if an agreement had been concluded over the weekend, sanctions relief would not have extended to Iranian oil exports,” wrote Croft, citing comments to the press by lead US negotiator Wendy Sherman.
And a lifting of sanctions on Iran cannot come from the White House alone. “Many of the most onerous sanctions - including the restrictions on dealing with the Iranian central bank and the requirement for foreign countries to reduce their Iranian oil imports every six months - originated in the US Congress not the White House,” said Croft. “While President Obama has latitude to waive implementation, outright repeal would require action by both houses of Congress.”
Sanctions have not only impacted Iranian crude deliveries, they have also severely dented the country’s ability to sustain production, and will likely slow any ramping up of export volumes.
“Production at existing fields is already in decline, given the lack of investment and technology required to enhance recovery rates,” said Croft. Growing output takes time, and mature oil fields that require increasing volumes of natural gas for injection will have to compete with Iranian natural gas demand for power generation, which should tick up in coming winter months. Fuel oil volumes will also likely be diverted from exports to domestic power plants to shore up feedstock if natural gas supplies fall short. “Iran’s fuel oil exports are expected to fall to as little as a third of previous levels over the winter.”
A Deal Before 2014?
But energy trading and risk management export Dominick Chirichella expects some sort of a nuclear deal with Iran in the coming months, which could impact global oil markets – and prices – as soon as next year.
“The IAEA [International Atomic Energy Agency] reached agreement with Iran yesterday to broaden the area for inspections which is a sign that the Iranians are still very interested in a deal to ease the sanctions,” Chirichella said in market commentary at the CME Group website.
“There is a lot of momentum coming from both sides to get a deal done,” said Chirichella, who expects a deal to be reached this year, with an easing of sanctions to start next year. “This will result in Iranian oil starting to flow back into the market sometime during 2014 which would be a bearish outcome for oil prices.”