Oil prices bounce back as Iranian sanctions are assessed

Oil prices rebounded on Monday as the market assessed the preliminary deal reached last week and absorbed that dismantling sanctions on Iran will be a slow process, even if a final deal on its nuclear programme is reached later this year.

The world benchmark North Sea Brent crude oil futures were trading at US$56.47 late in the day in the UAE, which was up $1.52 from the previous close but in thin holiday trading with much of Europe still closed for the Easter holiday.

Brent has traded in a range between $50 and $60 per barrel for some weeks, with its ups and downs driven by competing narratives of potential supply disruption – Libya, Yemen, Iraq – versus the prospect of more Iranian supply being released into an already oversupplied market.

Saudi Aramco, the kingdom’s state oil company, announced that it would raise margins for Asian customers for crude oil shipping in May, but it lowered those margins for US customers, reflecting the different supply-demand fundamentals in those markets.

On the Iranian story, the analysis since last Friday’s framework agreement was reached has made it increasingly clear that there is still a long way to go before a deal is finalised and sanctions are eased, which would allow Iran to start to sell significantly more oil on to the market.

Indeed, in a video interview with The New York Times on Sunday, the US president Barack Obama underlined that the deal last week was preliminary and there is still some way to go before a final arrangement is put in place.

“We’re not done yet. There are a lot of details to be worked out yet and you could see backtracking and slippage and real political difficulties both in Iran and obviously here in the United States Congress,” Mr Obama said in the interview. “It’s better than fifty-fifty now [that a deal is reached] but there is still work to do.”

Even then, he went on, there will be a staged lifting of the United Nations sanctions put in place in 2011, which will only allow Iran to sell more of its oil as it reaches certain milestones within the agreement. Furthermore, the US president added, certain US sanctions will remain in place as they are related to Iran’s sponsorship of terrorism and its ballistic missile programme.

Iran has about 700,000 barrels per day of spare capacity that it has not been able to sell for the past three years because of sanctions. Even when sanctions are lifted it is not clear how long it would take to revitalise the fields and market the additional crude oil.

The present market fundamentals still point to oil prices remaining in the trading range that has prevailed since the start of the year for some time, analysts said.

“This combination of a stronger US dollar, a slowing China, and falling commodity prices is not going away any time soon,” Francisco Blanch, a commodities analyst at Bank of America Merrill Lynch, pointed out.”

“As the money runs dry [that is, the monetary easing by governments] and governance issues across emerging markets spring up, expect global oil demand to stay soft. We reiterate our view that Brent will average $52 a barrel in 2015 and $58 a barrel in 2016.”

Amrita Sen, an analyst at Energy Aspects, notes that strong demand for petrol and diesel in recent weeks has kept refineries running at a good clip, which in turn has meant crude oil demand has been steady. This has been balanced by the continued oversupply.

She expects prices to stay steady as demand continues to slowly recover, with oil prices trading within their recent range and gradually increasing.

“This is despite our view of a likely partial deal with Iran, and the discharging of Iranian [oil held in] floating storage in the second quarter 2015, regardless of the deal,” Ms Sen said.

“We are likely to see prices hover around the low $50s [for Brent] for a while, before they grind higher.”


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