Oil falls after US-Iran deal progress, sanctions waiver

[LONDON/NEW YORK] Oil declined on signs of progress in US-Iran peace talks, including a waiver allowing some Iranian oil sales, bolstering hopes for a continued recovery in flows from the Persian Gulf.

Brent crude fell about 3 per cent to settle under US$78 a barrel while West Texas Intermediate’s most active contract settled below US$74. The US issued a 60-day license allowing the sale of some Iranian oil and petroleum products, citing “productive talks” in Switzerland. That will offer Teheran an economic lifeline and help facilitate the sale of more than 30 million barrels of oil that departed Iran for Asia in the past week.

Transits through the Strait of Hormuz have also ticked up more broadly, even after negotiations got off to a rocky start. Shipping data compiled by Bloomberg showed millions of barrels of oil flowing through the chokepoint over the weekend.

“Hormuz transits are going to be treated a bit like a proxy for progress on physical oil and at diplomatic level to a degree,” said Neil Crosby, head of research at Sparta Commodities. “And the direction of travel – ie rising – is most important for now.”

The war in Iran choked off supply through one of the world’s most vital trade routes for seaborne oil. Crude futures have retreated in recent weeks, although prices remain slightly higher than pre-war levels, after global refiners found temporary workarounds, and as the prospect of an end to the conflict fuelled optimism over a rapid return to normality.

A peace deal would, in theory, unleash a gush of supply in the face of weak immediate demand, especially given a slump in purchases by top importer China. About 80 million barrels of crude are set to suddenly hit the market should Hormuz fully reopen, threatening to leave refiners swamped.

The waivers, which were promised in the memorandum of understanding between the US and Iran, do not necessarily boost widespread expectations for more supplies and lower prices in the short run, according to Rachel Ziemba, senior fellow at the Center for a New American Security.

“The big question is going to be less about Iranian supplies and more about the willingness and ability of the Gulf countries, places like Iraq that have shut in production, to scale it back up,” Ziemba said.

Persian Gulf producers are preparing for a production ramp-up, with Kuwait cancelling earlier force majeure notices. Abu Dhabi National Oil told customers to resume loading supply from inside the Persian Gulf, while selling spot crude in a series of tenders.

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And the sanctions relief may open the door for purchases of Iranian oil in countries such as India, Ziemba said. Chinese entities with lower risk appetites may also scale up purchases from the Islamic Republic under the waivers.

Still, the rush of barrels might not be enough to stave off supply concerns in the longer run. Crude and product deficits stand between three-and-a-half to four million barrels a day, according to Ryan McKay, senior commodity strategist at TD Securities.

“As the market ultimately remains tight throughout the summer, the set-up for higher oil prices remains very strong,” McKay said. BLOOMBERG