Oil prices have been experiencing very intense volatility in recent weeks. Brent crude futures are undergoing variations of up to ten dollars in a matter of days, moving in a range that has a ceiling in the area of 103 dollars and a floor of 92 dollars. This week they have touched falls. (which would increase the supply of crude permanently), while the harsher tone of the central bank is putting fear into the body of investors. To this must be added the growing problems in China, the world’s largest oil importer.
Analysts at TD Securities believe declines of around 9% in Brent crude this week are justified “amid a decline in commodity demand, likely exacerbated by a new Chinese lockdown in Chengdu, coupled with increased odds of an imminent resolution in the case of Iran (the long-awaited nuclear deal). The wild swings in our indicator of energy supply risks, which draws information from market prices, are overwhelmingly being driven by the potential of an Iran deal.” , maintains these experts.
The bullet that can kill oil bulls
“This is the silver bullet that can end the bull market in petroleum products, as it would immediately create spare capacity (oversupply of crude oil) in the world, which in turn allows other producers to start to rebuild their oil reserves and inventories,” say the experts at this firm.
Iran has been stockpiling oil for a while. Instead of reducing its production with the same intensity that the demand for Iranian crude was reduced by the sanctions, Tehran has continued to extract a little more oil that it has been accumulating in its tanks and ships. This crude has the ability to almost crash into the market once sanctions are lifted, which could have an immediate impact.
An ‘arsenal’ of oil
It is estimated that Iran could have some 93 million barrels of crude oil and condensate stored in ships in the Persian Gulf, off the coast of Singapore and near China, according to the ship tracking firm Kpler, with data collected by the financial agency Bloomberg. On the other hand, the firm Vortexa estimates that the extra reserves of Iranian crude oil are between 60 or 70 million barrels. In addition, there are also some smaller tanks that could also contain a few million more barrels of oil.
“Iran has built a sizeable fleet of cargoes that could hit the market pretty soon,” John Driscoll, chief strategist at JTD Energy Services, told Bloomberg. Beyond this ‘silver bullet’, Iran could return to its pre-sanctions production levels, which would have a more structural impact on the oil market. This country has one of the largest oil reserves in the world (oil still not extracted),
Joel Hancock, an economist at Natixis, explains in a report that the return of Iran would have an impact similar to a release of structural oil reserves. Right now, the OECD countries, but especially the US, are releasing around a million barrels of crude oil from their strategic reserves to meet the demand for crude oil in a very tense market. The difficulties in obtaining Russian oil are compounded by the refusal of Saudi Arabia and its partners to produce more crude. The OPEC cartel is comfortable with oil close to 100 dollars, prices that they would not have imagined even in their wildest dreams after the powerful emergence of fracking and shale oil in the US back in 2014-2015. Now they want to make the most of this ‘opportunity’ that triggers the income of the producing countries.
However, the strategic reserves of developed countries are not infinite. So the return of Iran to the market would be a relief. “Saudi Arabia seems emboldened and wants to aggressively manage the market to avoid a significant price drop. The impact of additional Iranian supply and the alleged reaction from OPEC suggests that the market will be less tense in 2023, which would allow a reconstruction of inventories of about 0.53 million barrels per day. We expect this to represent a decrease of between 5 and 10 dollars on our base forecast of a crude of 100 dollars”, explains Hancock.
This expert believes that the greatest downside risk for the price of oil will take place in the first quarter of next year. Crude oil prices would have to deal with the return of Iran, the incorporation of those millions of accumulated Iranian barrels into the market and the economic reality that
On the other hand, “a price rebound in the third quarter of 2023 may occur, although it will probably be more moderate, as the market tightness in our base case is substantially alleviated by the return of Iranian barrels. In fact, Iran’s return could be interpreted as a release of structural oil reserves that would ultimately make the loss of Russian oil from the market less of a concern.”
Iran can recover oil production levels quickly
In another report, TD Securities experts explained that despite the sanctions, Iran has maintained many of its operating fields, in addition to maintaining key customer relationships during the years it has been shut out of world trade: “The country could add up to 900,000 barrels per day of production within three months of sanctions relief, and potentially pump close to its full capacity of around 3.7 million barrels per day within six months,” according to government sources in the country. Persian. Iran could lead the market to an oversupply that would allow it to rebuild inventories globally.
What if there is no deal with Iran?
Despite everything, the experts at TD Securities point out that “the failure to reach an agreement with Iran would suggest that oil will continue to be a runaway train, since even with a slowdown in demand growth, inventories worldwide could go further down.”
On the other hand, it should be noted that this Monday, OPEC and its partners will meet on September 5 to decide the production levels for October. Last month, recent comments from Saudi Arabia, backed by many other OPEC+ members, suggest that a more likely outcome this time is no change, especially in the context of ongoing discussions over a nuclear deal with Iran. This could give crude a new boost until Iran’s return to the market materializes.