The oil market is in a dangerous balance. Demand continues to surprise on the upside, while supply is slow to adapt. As a consequence, inventory levels are at their lowest in recent years. And to top it off, the OPEC countries say that their ability to produce more crude oil is close to the limit and geopolitical risks do not help either. However, there is a country that has a lot of idle capacity, which means that it is pumping oil well below its potential because its exports are ‘captured’. Now his return to the global oil market could be a boon to the world.
The lifting of sanctions on Iran could completely change the landscape of the oil market, turning the supply deficit into a surplus, calming prices and reducing the inflationary pressure that already threatens to derail the world economy. Iran can produce up to 4.5 million barrels per day of crude, compared to the 2.5 or 3 that it is currently producing ‘officially’.
Brent oil, a world reference, is trading close to 93 dollars per barrel, levels not seen since 2014 (this day it falls 4% precisely due to rumors of Iran’s return to the market and by a partial withdrawal of Russian troops from the border with Ukraine). Oil demand continues to outstrip supply and inventories are slowly running down. The International Energy Agency warned last week of this situation, an oil market without a net or a cushion.
“OECD industry oil inventories plunged by 60 million barrels in December, to be 255 million barrels below the five-year average and at their lowest level in seven years… Oil at multi-year lows and OPEC+’s shrinking spare capacity have left the market with only a small cushion.”
The key is to increase investment and produce more oil until the world is once and for all less dependent on this polluting fossil fuel. However, this process requires time that the economy does not have. Therefore, the return of Iran to the markets can be a simple, fast and effective solution to put out the oil fire. “A deal with Iran could turn the game upside down for oil, possibly tipping balances toward a surplus of between 500,000 and one million of barrels per day,” calculate economists at Bank of America Merrill Lynch.
This surplus would have very important implications for the oil market. On the one hand, the rally in crude oil would be capped and the price of Brent would be prevented from reaching new highs. Furthermore, “a surplus of this magnitude would probably would lower Brent oil between 10-15 dollars providing consumers and central banks with inflation relief,” BofAML experts say.
Analysts at the American bank acknowledge that the forecasts may vary drastically if Iran returns to the market, a political decision that has little to do with the fundamentals of the market, which complicates the forecasts on crude oil prices. “We first set a Brent price estimate at $120 a barrel for this summer. But this price projection was based on an expectation of a very tight market (matching supply and demand) and persistently low inventories during the first half of 2021. “.
All these forecasts may become useless if, as it seems, Iran recovers the capacity to export crude oil to developed countries. “If the US and Iran reach an agreement to restore the Joint Comprehensive Plan of Action (PIAC) in the coming weeks, new Iranian volumes could quickly enter world oil markets and affect prices,” they explain from BofA.
“For our forecasts, an agreement with Iran would be a game changer, which could lead to the world market for oil into surplus of between 500,000 and a million barrels or more in the second half of 2022 and 2023. A surplus of this magnitude would probably push Brent oil prices to fall between 10 and 15 dollars and avoid the expected peak in the summer, providing relief. consumers hit by inflation and giving some rest to nervous politicians”, point out the analysts of the American bank.
The mystery of Iran and its oil
The uncertainty lies not only in the return or not of Iran to the markets, it is also justified because nobody really knows what Tehran is really exporting ‘under the table’ to allied countries or countries interested in cheap oil. According to terminal data Bloomberg As reflected in the graphs, Iran’s crude exports have fallen by almost 2.5 million barrels per day since the sanctions came into force again in 2019, with Donald Trump as US president.
This decline in exports is also reflected in the production data. Iran has reduced the rate of pumping crude because it makes no sense to produce beyond its internal consumption, because the facilities to store crude oil are very limited.
However, BofA analysts are not so clear: “There is a lot of speculation about how much oil Iran is exporting under the table. While data from ship trackers reveals that Iran’s exports are about 140,000 barrels per day in recent six months, other shipping sources suggest that unofficial volumes could already reach 1.1 million b/d.” Depending on what the real data is, the impact of Iran’s official return to the international oil markets will be greater or lesser. Even the International Energy Agency itself has problems calculating the consumption and real demand for oil in the world.
However, everything indicates that Iran will return sooner rather than later to the global markets. The sharp rise in oil prices seems to have given ‘wings’ to Western leaders to resume negotiations with the Islamic Republic of Iran. What is more, this week several important members of the US and the EU have come out to ensure that talks are underway. The stakes are high for the world, since Iran has the ability to lower the price of oil, and thus the tide of inflation is eroding the popularity of Western leaders.
Oil falls 2%
The High Representative for Foreign Policy of the EU, Josep Borrellassured this Monday that the nuclear agreement with Iran, the Comprehensive Joint Action Plan (PIAC), “Is in sight”. “Another important call with the Iranian Foreign Minister, Hosein Amirabdolahian. As coordinator of the PIAC, I deeply believe that the agreement is in sight,” Borrell said on Twitter. Oil reacts with falls of 4%, which take Brent to 92 dollars, before the possible agreement with Tehran.
“The time has come to make one last effort and reach a compromise,” added the head of European diplomacy. When oil becomes a threat for the economy, there is a rush to reach an agreement with Iran.
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