Crude oil prices started the week on the decline ahead of this week's summit at the U.N. General Assembly. At center stage this week will be Iranian President Hassan Rouhani, whose Western charm offensive is a breath of fresh air in an otherwise troubled region. A weekend report suggested Rouhani's moderate stance may be enough to convince British authorities to let BP work again with Iran at a North Sea natural gas field hampered by sanctions. India, meanwhile, is eager to see how close to the sanctions envelope it can get with Iranian oil imports. Rouhani speaks Tuesday. His speech may have wide-ranging repercussions across the global energy sector.
Crude oil for November delivery was down Monday, on average, by more than $1 from last week on signs at least some of the tensions in the Middle East were subsiding. Past conversations regarding Iran and international oil markets typically centered on the ever-present threat to close shipping lanes through the Strait of Hormuz and the impact of international economic sanctions. This week, however, the talk is focused on the possibility of handshakes, symbolically at least, between Iran and the United States.
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The British government is reportedly mulling sanctions that have limited production from the Rhum natural gas field in the North Sea. Sanctions in 2010 targeting Iran's energy sector suspended operations at a field that once contributed 5 percent of Britain's natural gas output. A government spokesman said it was "long-term security of the Rhum gas field" that was at stake in the decision, though BP and its joint venture partners, National Iranian Oil Co., could make millions of dollars in the restart. A weekend report said sanctions relief for Iran already helped open the spigot on the Shah Deniz natural gas field offshore Azerbaijan for European markets.
Indian Prime Manmohan Singh said he wanted to raise the amount of oil imported from Iran. New Delhi says it could cut as much as $25 billion off its oil bills by inching closer to the U.S. sanctions envelope. A lower rupee value, which Iran accepts for some oil payments, has left a black mark on India's economy. Iran's trading partners in Asia already receive sanctions waivers from the U.S. government for "significant" cutbacks in Iranian crude oil purchases. Indian officials say there's room yet to maneuver within the U.S. sanctions regime, however.
Iran is one of the largest crude oil producers in the world, yet its output has plummeted as a result of tightening sanctions. OPEC in its market report for September said Iranian oil production fell last year by 18 percent to 2.9 million bpd. The rial, Iran's national currency, started showing signs of a rebound when Rouhani, a former nuclear negotiator, took office in August. The currency collapsed last year under sanctions pressure, though Iran's close relationship with Syria continues to drag on the rial's value.
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Rouhani and U.S. President Barack Obama exchanged letters on the nuclear issue last week. White House spokesman Jay Carney said Washington was ready to resolve the issue in a way that lets Iran show its nuclear program is for peaceful purposes. Yukiya Amano, director general of the U.N.'s nuclear watchdog said roughly a month into Rouhani's term that regulators, however, "cannot conclude that all nuclear material in Iran is in peaceful activities."
Sanctions pressure has kept Iran a few years away from a nuclear breakthrough for more than a few years. Barring full suspension from the Rouhani administration, Iran's nuclear work will likely continue to develop. Last September, Iran was calling for oil prices of "at least" $150 per barrel. This September, while Rouhani's speech before the U.N. General Assembly may be heralded as a sea change for the Islamic Republic, its nuclear work, and the oil market's reaction, may be the true indicator of Iran's intentions.
By. Daniel J. Graeber of Oilprice.com