Oil prices are holding their high ground today despite bearish signals that a nuclear deal with Iran maybe be getting closer, as the expected global demand recovery this summer seems strong enough to absorb the effect.
Even if oil loses some dollar cents today the fact is that price levels still remain well within reach of the $70 mark.
Global optimism over the coming strong summer demand is overwhelming and does not seem to allow oil prices to miss out on the future opportunity at the cost of potentially seeing the added Iranian barrels available on the market.
The market is noticing that the detente between the US and Iran continues to lighten, giving rise to optimism that a deal may be just around the corner, which explains some limited bearish oil trading reactions.
However, we do find it more improbable than probable that the 2015 nuclear deal between Iran, the US, and the other five world powers will be revived before Iran’s presidential election on 18 June 2021.
Looking at what is actually happening on the ground, increased domestic demand and a steady trickle-up in exports in the first quarter of 2021 indicate Tehran is pursuing a more aggressive oil production ramp-up than previously forecasted, and the US so far has not outright or publicly intervened in this ramp-up.
Our current base case is that sanctions will be lifted from the second quarter of 2022 onwards. However, talks are quickly progressing, and Iran is planning to start exports from its 1 million bpd Jask terminal from June.
Now more than ever, with the fresh economic impact of Covid-19, Iran wants to sever its economic isolation and return to the world oil trading exchange.
If Iran does start up exports from Jask from June and an agreement with the West is reached by the third quarter of this year, Iranian supply could already climb back above to 4 million bpd in the first half of 2022.
Most of the legacy fields like Ahwaz, Marun, Gaschsaran and Abuzar have seen production drop due to limited takeaway capacity. These fields, along with others can quickly ramp up within 3-6 months and lift the country’s output by 1.8 million bpd, which is currently accounted for as unutilized capacity.
The immediate supply risk appears to be some portion of the 1 million bpd from the Jask terminal as soon as June, but there is also the risk that Iranian barrels at sea – by some estimates as much as 70 million barrels – may also become available in the market.
Hefty volumes of this storage build-up is likely the country’s flagship ultra-light South Pars condensate blend.
Iran may show restraint though with how much supply it makes available in case of an agreement in return for OPEC+ leniency.
At the coming OPEC+ meeting, we expect that the alliance will sit still on June 1st and wait out the outcome of the Iran negotiations before making any drastic changes to its current output deal.
