Why oil traders should keep an eye on Iran even as nuclear talks look unproductive

  • Apr 15, 2021
  • Investing

The U.S. and other world powers haven’t made much progress in reaching a new nuclear deal with Iran, but with data showing the nation’s crude oil production at a nearly two year high, traders can’t afford to ignore the amount Iran can potentially add to global supplies.

“Iran’s export capacity is approximately 2 million barrels per day, and it appears that it is already skirting the sanctions” by selling oil under the radar to Chinese buyers, said Manish Raj, chief financial officer at Velandera Energy. He believes that an additional 1 million barrels per day of Iranian supplies are ready to hit the market as soon as the sanctions imposed by former U.S. President Trump are lifted.

In a monthly report issued this week, the International Energy Agency said that despite U.S. sanctions, Iran has been “opening up the taps since late last year,” with its crude supply reaching 2.3 million barrels per day in March, which is the highest in nearly two years.

The IEA said shipments of Iranian oil, including crude and condensates, had slowed to a “mere trickle” from 2.5 million barrels a day after the former Trump administration withdrew from the Joint Comprehensive Plan of Action (JCPOA) in 2018 and imposed sanctions instead.

“China, however, never completely stopped its purchases,” the agency said, noting that Iran’s estimated oil sales to China in the fourth quarter of 2020 were at 360,000 barrels a day, up from an average 150,000 barrels per day shipped in the first nine months of last year. In March of this year, exports to China were estimated at 600,000 barrels a day, it said.

And the “hefty purchases appear to be continuing” as Washington and Tehran restarted indirect talks in early April to restore the 2015 JCPOA, the IEA said.

Read: What the Iran nuclear talks mean for oil prices

Discussions regarding the deal, which aimed to keep Iran from developing nuclear weapons, reportedly restarted on Thursday in Vienna.

“If negotiations succeed and sanctions are eased, up to 1.5 [million barrels a day] of additional Iranian crude could return to world markets in relatively short order,” said the IEA.

The discussions, however, have been complicated by Iran’s decision earlier this week to enrich uranium at 60% purity following a recent attack on its Natanz nuclear site, which it blamed on Israel. That brings Iran closer to the 90% purity required for weapons-grade material.

“If Iran continues to hold its fire in the face of mysterious attacks on critical infrastructure and personnel, we still believe that the chances are good that the nuclear accord can be revived and sanctions lifted,” analysts at RBC Capital Markets wrote in a research note dated Wednesday.

The next two weeks will be “pivotal” for the near term fate of the Iranian nuclear agreement, they said, as the window for reviving the deal is closing with the Iranian election season fast approaching. The nation will hold a presidential election in June.

If the discussions fall apart, “there could be some disappointment that might have a marginal impact on the oil market, though it doesn’t seem likely to take much off the market in terms of current Iranian exports,” said Marshall Steeves, energy markets analyst at IHS Markit.

“Rather, the question is whether renewed talks might lead to an increase in exports at some point this year,” he told MarketWatch. “We haven’t really priced in a significant increase at this point, and I think most are taking a wait and see approach.”

Oil prices were modestly higher in Thursday dealings, with June Brent crude BRNM21, +0.45% BRN00, +0.45% up 23 cents, or nearly 0.4%, at $66.81 a barrel on ICE Futures Europe. May West Texas Intermediate crude CLK21, +0.41% CL.1, +0.41% traded at $63.29 a barrel on the New York Mercantile Exchange, up 14 cents, or 0.2%.

Although the prospect seems to “be a ways off for now,” a release of sanctions could “open the door” to an additional 1 million barrels per day in exports, said Steeves.

Unless others within the Organization of the Petroleum Exporting Countries make up for that increase, “it could pressure prices,” he said. Then again, if demand is accelerating at that time, “it could be absorbed if the rate of demand growth exceeds the additional supply growth.”