Oil markets have become very volatile this week as traders try to understand a mix of bullish and bearish drivers. Oil prices rebounded midweek after the latest EIA report showed crude oil refining hit the highest level since August 2019 in anticipation of strong summer demand. However, the same report showed that US crude oil production hit the highest level since April 2020, while crude oil exports fell.
In fact, Standard Chartered’s commodity analysts called the report neutral
Its proprietary bull-bear index for US oil data rose 34.1 w/w to +8.5 (Fig. 58). US Crude Oil
Inventories are down 2.72m from the five year average and are down 10.54m
However, crude inventories at the WTI price center in Cushing, Oklahoma, rose for the seventh straight week and are currently close to the five-year average. The w/w crude oil balance shows unusually large fluctuations in exports and imports.
However, the most pessimistic news came outside of the US market with reports that Iran may soon officially resume oil exports.
Source: Standard Chartered Research
Iran wildcard
US crude oil fell nearly 5% on Thursday, briefly trading below $70/bbl after reports emerged that the US and Iran are making progress on resuming talks on a nuclear deal, a move that would lift sanctions on Iran’s oil exports could loosen.
Israeli newspaper Haaretz reported that talks are progressing faster than expected and there is a possibility that an agreement could be reached within weeks. Terms of the deal are expected to include Iran halting its uranium enrichment activities by 60% or more in exchange for permission to export up to 1 million barrels of oil per day. Related: Pentagon papers show Saudi Arabia and US traded threats over oil
The prospects for a revival of the Iran nuclear deal have changed dramatically, from almost certain in March to near zero by the end of 2022 and now this. Desolate economic conditions are likely to force Iran sooner rather than later to accept surveillance and sign a new nuclear deal as the country’s foreign exchange reserves plummet from $122.5 billion in 2018 to just $20 billion in 2018 shrunk sharply in 2021 before recovering to $41.4 billion. In 2022, the volume of foreign currency-denominated capital flight from Iran will be close to $5 billion, leaving Iran not in a particularly enviable location.
A successful nuclear deal could transform oil markets. Former Iranian Oil Minister Bijan Namdar Zanganeh said his biggest dream had always been to increase Iran’s oil production to six million barrels a day; We will earn $2 trillion from oil exports over the next two decades and use the proceeds to invest in the country’s development.
Such a level of production would certainly cause significant unrest, especially given that OPEC is poised to put the country back in its place once sanctions are lifted. But how realistic are Iran’s oil ambitions, and how worried should oil bulls be that another major producer could cloud things for everyone?
Not much is likely to change in the short term as Iran rejoins the oil markets. Finally, it is an open secret that Tehran is flouting US sanctions, using multiple covert methods to avoid detection and sell its crude oil to China.
In the long term, however, things could turn out differently.
Iran’s current production of about 2.5 million barrels per day is 1.2 million barrels per day down from the 2018 peak of 3.7 million barrels per day.
Increasing production from the current 2.5 MB/day to 6 MB/day could take at least several years. And even then it would still be far from certain. Over the past four decades, Tehran has failed miserably to adequately invest its oil revenues in its production capacity or to diversify its economy. In fact, at no point since the 1979 revolution has the Islamic Republic been able to produce more than 4 million bpd. To complicate matters further, foreign investors have largely stayed away from Iran’s economy in the four decades since the Islamic Republic was founded. In stark contrast, foreign investment – mainly oil-related – in Arab countries, including Saudi Arabia, exceeded US$170 billion from 2006 to 2012 and has been growing steadily at US$10 billion annually since then.
Part of the problem is that the state-controlled economic model squanders more than $50 billion annually on oil and gas subsidies to keep its citizens compliant. The result is that Iranians have the cheapest gas and electricity prices in the world, but face high unemployment and inflation as the economy relies too heavily on petrodollars. Given the recent spate of populist promises of even more subsidies, there is little reason to believe that Raisi’s government will do much to reform the economic model.
By Alex Kimani for Oilprice.com
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