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Crude Traders Skeptical Iran Deal Will Bolster Oil Supplies

November 27, 2013

Crude Traders Skeptical Iran Deal Will Bolster Oil Supplies

Iranian Revolutionary Guards drive a speedboat in front of an oil tanker at the port of Bandar Abbas on July 2, 2012. Photographer: Atta Kenare/AFP via Getty Images

Crude traders are skeptical that the accord loosening some economic sanctions against Iran in return for limiting nuclear work will lead to a surge in oil supply from what was once OPEC’s second-biggest producer.

Brent, the benchmark for half the world’s crude, rose 43 cents to settle today at $111.31 a barrel in New York, little changed from where it was before the agreement was reached Nov. 24. While oil fell as much as 2.7 percent the next day, futures erased the decline by the end of the trading session.

“Brent had a knee-jerk selloff,” said Stephen Schork, president of the Schork Group Inc., a consultant to the energy industry in Villanova, Pennsylvania. “The market is skeptical that this is as bearish as it would seem to be.”

The six-month agreement capped the country’s crude exports at 1 million barrels a day. Until the U.S. removes all oil sanctions, markets are unlikely to slump, according to Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. American authorities say Iranian crude sales are down 60 percent from when petroleum restrictions began in late 2011.

Brent for January settlement on the London-based ICE Futures Europe fell as much as $3 to $108.05 a barrel on Nov. 25. Brent is up 0.2 percent in 2013, after more than doubling in the previous four years. West Texas Intermediate, the U.S. benchmark, dropped $1.38 to $92.30 today.

Market Skepticism

“Markets appear skeptical about the chances of a final agreement with Iran leading to a lifting of the oil embargo, until there is more clarity around what that deal will contain precisely,” said Julius Walker, global energy markets strategist at UBS Securities LLC in New York.

The agreement limits Iran’s atomic activities in exchange for as much as $7 billion in relief over six months. It allows Iran to export oil at current levels, rather than forcing additional reductions by buyers, as would have been required under current law, according to a White House statement. The accord relaxes restrictions on cars, petrochemicals, aviation parts, gold and insurance for oil cargoes.

“The reaction of the market makes a lot of sense,” said Michael Wittner, head of oil market research at Societe Generale SA in New York. “The bottom line is that this interim deal changes almost nothing. There will be no new oil coming out of Iran.”

Revenue Loss

The crude sanctions have deprived Iran of more than $80 billion in revenue, U.S. President Barack Obama’s administration said in the Nov. 25 statement after the agreement was reached between Iran and the so-called P5+1 nations -- the U.S., U.K., China, Russia, France and Germany.

Iran was the sixth-largest producer in the Organization of Petroleum Exporting Countries last month, with 2.6 million barrels a day, down from 3.5 million in January 2012, according to a Bloomberg survey.

“This is a six-month agreement and it’s really too early to tell any possible outcome,” Maria van der Hoeven, executive director of the International Energy Agency, told reporters in Moscow on Nov. 25. “What we do know is that the agreement does not directly affect oil sanctions in a big way.”

Under the U.S. embargo that started Feb. 6, Iran’s six remaining buyers -- China, India, Japan, South Korea, Turkey and Taiwan -- can purchase its oil only with their own currencies, not with dollars or euros, and must deposit payments in accounts that Iran can use only to purchase local goods.

Limited Oil

“The market isn’t moving a lot because of the limited amount of oil that’s expected to hit the market and on skepticism about the longer-term prospects for the agreement, especially given all the posturing from Congress,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

Crude imports from Iran totaled 715,000 barrels a day in October, down from 1.26 million the prior month, according to the IEA. Exports averaged 1.1 million in the first nine months of this year.

The volume of Iranian crude oil available to the international market will “remain largely unchanged over at least the next six months,” Goldman Sachs Group Inc. (GS:US) predicted in a report published Nov. 25. Morgan Stanley said in a note that any “substantial weakness” in prices following the announcement of a deal would be an “overreaction.”

Insurance Ban

As part of the agreement, the European Union will lift a ban on insurance for tankers transporting Iranian oil, making it easier for the Persian Gulf nation’s six remaining international customers to take delivery.

The relaxing of the insurance restriction might ease shipping and increase Iran exports by 200,000 to 400,000 barrels a day, Kevin Book, managing director of ClearView Energy Partners LLC, a Washington-based consulting group, said.

Even if Iran and world powers reach a comprehensive accord and the oil embargo is eased, the country would struggle to raise exports by more than 300,000 to 400,000 barrels a day in one month, Walker said.

“Iran’s production capacity has shrunk due to a lack of investment and technology, though it could also potentially sell some crude out of accumulated stocks,” he said.

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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