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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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New Iran Nuclear Deal May Completely Derail Oil Price Rally

According to senior political and economic sources who work closely with the current Iranian government exclusively spoken to by OilPrice.com last week, the U.S. has agreed to a tentative removal of key sanctions in the oil, gas, petrochemicals and automotive sectors, plus some of those on Iran’s banking sector. However, Supreme Leader, Ali Khamenei, and the senior figures of the Islamic Revolutionary Guards Guard Corp (IRGC) are also demanding the additional removal of individuals and their businesses from the U.S.’s sanctions list. Although Khamenei (fully supported by the senior IRGC generals) has repeatedly stated that Iran will not – and legally is not required to – renegotiate any elements of the Joint Comprehensive Plan of Action (‘nuclear deal’) from which the U.S. unilaterally withdrew in May 2018, the Iran sources believe that they may yield on this intransigent stance. “Tehran may be folding, with nationwide power outages and rising food shortages, rising inflation and depreciation of the rial raising the prospect of widespread civil unrest across the country,” one of the Iran sources said last week.

Despite the comments of many who have never traded anything in the financial markets (corroborated by those who have but who are talking up their own long crude positions) that there will be little effect on the oil price when at least 2.5 million barrels per day of Iranian crude oil returns to the market, this is highly unlikely to be the case. The fact that global trading giant Goldman Sachs is still targeting Brent crude oil to hit US$80 per barrel at some point this year, however, is significant in three ways. First, it means that Goldman itself has already authorised its mighty proprietary trading vehicles to buy Brent in a market that has nowhere near the liquidity of, say, the global foreign exchange (FX) market, meaning that traders can get a lot more trading effect for a lot less money in oil than in FX. The price action of this sort of activity by a true trading giant such as Goldman has been sufficient in and of itself on many occasions in the past to significantly move and sustain prices at certain key levels. Second, given Goldman’s stellar trading reputation in many financial markets not only will its own major clients also be buying Brent but so will all of those in the markets who are aware of what a recommendation from Goldman can do to as asset’s price, so producing a self-fulfilling trading prophecy scenario. This said, though, there is only so long that the fundamentals of supply and demand can be bucked, especially in the oil market and even more so when the U.S. government does not want oil prices higher.  Related: China Boasts Successful Nuclear Fusion

As was very clearly demarcated under the government of former President Donald Trump – but pertains to all U.S. presidencies of recent years – Washington simply does not want oil prices on the higher side in general. The economic reason for this is that for every US$0.01 that the U.S.’s national average price of gasoline rises more than US$1 billion per year in discretionary additional consumer spending is estimated to be lost. As a general historical rule of thumb, it is estimated that every US$10 per barrel change in the price of crude oil results in a US$0.25 change in the price of a gallon of gasoline. Based on more recent historical precedent, a US$90-95 per barrel of Brent oil price equates to around US$3 per gallon of gasoline and a US$125-130 per barrel of Brent equates to around US$4 per gallon of gasoline. The ‘danger zone’ for U.S. presidents starts at around US$3.00 per gallon and at US$4.00 per gallon, they are being advised to pack their bags in Pennsylvania Avenue or start a war to divert the public’s attention. The point was underlined by Bob McNally, the former energy adviser to the former President George W. Bush that: “Few things terrify an American president more than a spike in fuel [gasoline] prices.”

For Trump, the early warning for Brent oil pricing was anywhere above US$70 per barrel, which is why whenever Brent looked like it was going to trade decisively above there and towards US$75-80 per barrel he started to Tweet veiled threats to OPEC members, especially Saudi Arabia. Specifically, for example, when the Saudis (with the help of Russia) were pushing oil prices up over the US$80 per barrel of Brent level in the second half of 2018, Trump said in a speech before the U.N. General Assembly: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it,” he said. “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” The oil markets do not yet know what Brent price level would trigger concern from Biden’s administration but it is fair to assume that it is somewhere close to this US$70-80 per barrel range (with the same floor price of US$35-40 per barrel to safeguard the shale oil sector), given the negative effect on the U.S.’s post-COVID 19 economic recovery that rising and higher trending oil prices will have. Related: Oil Prices Rise At The Start Of Driving Season

Two and a half million barrels per day of oil coming into the global markets from Iran is certainly going to weigh on oil prices over time but it may be a lot more than this very quickly. It is wise to remember that despite the widespread but erroneous reports that Iranian crude oil exports had dropped to exceptionally low levels due to U.S. sanctions the reality was that Iran was still exporting large quantities of oil to China, as exclusively revealed by OilPrice.com. This constant stream of exports to China meant that Iran never had to shut down wells and this is why, according to industry figures, Iran pumped 2.43 million barrels per day (bpd) of crude oil in April. This said, immediately prior to the U.S. re-imposing sanctions in 2018, Iran pumped around 3.8-3.9 million bpd of crude, with realistic plans to increase this to at least 5.7 million bpd within two years of the Implementation Day for the JCPOA on 16 January 2016, although this target was shelved due to deals with Western oil companies not being finalised. Over the last two weeks, though, Iran has released various statements outlining plans to dramatically increase its oil volumes, initially very quickly from key fields in West Karoun – comprising the major fields of North Azadegan, South Azadegan, North Yaran, South Yaran and Yadavaran - which together are estimated to contain at least 67 billion barrels of oil in place. For every one per cent increase in the rate of recovery that can be achieved the recoverable reserves figure would increase by 670 million barrels, or around US$34 billion in additional revenues for Iran even with oil at US$50 a barrel. The focus on the West Karoun fields also neatly ties in to the very recent completion of the Goreh-Jask oil export pipeline.

Last week, Iranian officials stated that the Azadegan fields are top of the list of fields for further fast-track development and although officially this is to be managed by domestic Iranian companies in reality it will heavily figure Chinese companies. China National Petroleum Corporation (CNPC) is still the key foreign developer at North Azadegan, and the understanding agreed between Iran and China when France’s Total pulled out of South Pars Phase 11 was that China would eventually take over the development in exchange for which it would also be allowed to go into South Azadegan to create a unified field development programme with its North Azadegan activities. Currently, North Azadegan is producing around 80,000 bpd but the Phase 2 plan – including the spudding of the new wells – is aimed at boosting this output to at least 100,000 bpd. More specifically, China is expected by Iran to ensure that the output from North Azadegan when combined with the output from South Azadegan (currently being developed by Iranian firms) is at least 250,000 bpd. South Azadegan is now producing a steady 105,000 bpd with spikes to 115,000 bpd or so, according to Iranian oil industry sources. Longer-term, Iran’s plan is to increase the recovery rate from all of its oil fields, beginning with those in West Karoun to at least 25 per cent from the current 4.5 per cent (it was 5.5 per cent before U.S. sanctions were re-imposed). By comparison, the average recovery rate from Saudi Arabia’s oil fields is around 50 per cent, with plans to raise that to 70 per cent.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on June 01 2021 said:
    No it won’t and I will explain to you why.

    A lifting of US sanctions on Iran may not see the light of day even by 2023 or ever. The reason is that the positions of the United States and Iran are irreconcilable.

    Iran insists on a lifting of the sanctions first before it agrees to negotiate directly with the United States on the nuclear deal. On the other hand, the United States wouldn’t lift the sanctions or even ease them without an agreement on imposing strict limitations on Iran’s nuclear and ballistic missile development programmes which Iran will never ever accede to. This the United States supported by Israel and its Arab allies in the Gulf will never accept.

    The recent claim by Iranian President Hassan Rouhani that the United States was ready to lift oil and banking sector sanctions is no more than a ploy to rally his supporters to do well in the 18th of June presidential elections. The reason is that he knows that supporters of the Islamic Revolutionary Guard Corps (IRGC) are going to have a landslide victory in the presidential elections.

    Furthermore, the IRGC and its supporters will do their very utmost to derail negotiations with the United States unless they get a deal on their own terms.

    If in the very unthinkable possibility the sanctions were lifted, Iran could only bring 650,000 additional barrels a day (b/d) to the market. The reason is that Iran has been managing with help from China to export 1.5 million barrels a day (mbd) or 71% of its pre-sanction exports of 2.125 mbd. The 650,000 additional barrels a day are the difference between Iran’s exports pre-sanctions and those under the sanctions. This the global economy projected to grow this year at 6.3% can absorb with no effect whatsoever on prices.

    The claims that Iran can in time raise its production to 5.5-6.5 mbd are no more than pipe dreams mischievously intended to depress surging oil prices.

    The last time Iran managed to produce 6.0 mbd was in 1974 under the Shah. But in so doing, it has caused considerable and possibly irreversible damage to its well reservoirs from past over-production. Then came the war with Iraq which caused more damage to Iran’s oil installations and infrastructure followed by the US sanctions which deprived Iran from access to investments and latest technologies to repair the damage.

    The highest production Iran could achieve if and when the sanctions are lifted is 3.75-3.80 mbd. Iran is yet to manage to produce the production quota of 4.0 mbd allocated to it by OPEC.

    Brent crude oil price is projected to hit $70-$80 a barrel in the third quarter of this year and average $67-$68 for the year with global oil demand returning to pre-pandemic level of 101 mbd by the middle of this year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Roland Savage on June 13 2021 said:
    The rise in oil price is from the depreciation of the dollar, not from any actual phenomena in the production and distribution of oil. My own research of the oil price shows it almost perfectly matches changes to the money supply.

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