Last week in oil: The big Brent recovery as Iran sanctions loom

the close of last week, the Brent crude price had risen to $75.82 a barrel, with WTI (Nymex) also up late on Friday. (AFP)
Updated 25 August 2018

Last week in oil: The big Brent recovery as Iran sanctions loom

RIYADH: At the close of last week, the Brent crude price had risen to $75.82 a barrel, with WTI (Nymex) also up late on Friday.
Oil prices rose amid the fall in US crude inventories by 5.84 million barrels, the biggest drop in four weeks. Cushing, Oklahoma inventories were at multi-year lows, 40 million barrels down since mid-May. This was attributed to record-high US refining use amid healthy refining margins, and the summer driving season’s robust demand. Also, there has been a disruption of Syncrude production in Alberta since June.
The recovery in oil prices last week was also due to a tightening market as a result of the upcoming Iranian oil supply disruption.
Further tightening in the market came as S&P Global Platts figures showed sharply lower oil exports from Iran for the first half of August, down to 1.68 million barrels per day compared to July exports that averaged 2.32 million barrels per day.
In addition to the lack of upstream investment and new technologies, as the European oil supermajors have walked away from investing in Iranian upstream projects, Iran’s old oil fields are operating under severe production constraints and despite any cutback in exports, those fields will not be mothballed.
Instead they will keep pumping oil at a slow and steady pace. Iran will return to the 2012–2015 scenario, where it accumulated crude in floating storage vessels waiting for sanctions to end. This is the only way Iran can maintain production from its old wells. While Iran will still be producing, there will be fewer buyers.
Together, China and India have been the two largest purchasers of Iranian crude at about 1.2 million barrels per day. Unlike during the previous 2012-2015 sanction period, both China and India are trying in advance to navigate to other suppliers to partially replace Iranian crude. During the previous sanctions, China and India slightly trimmed their Iranian oil imports, but oil-to-goods swaps continued. When Iran had fewer customers both nations benefited from deeper discounts and took advantage of better terms. These trade swaps took years to settle.
It’s already clear that China and India are adopting different strategies in regard to Iranian oil. China is one of the biggest buyers of US oil exports. However, given the current China-US trade dispute, the Asian giant does not want to lose its Iranian crude imports. China has already been hit with the loss of Venezuelan crude, due to the collapse of production in the beleaguered South American nation. Now, China is indicating that it is still willing to purchase crude from Iran, even going so far as to switch to shipping the crude on vessels owned by the National Iranian Tanker Co.
On the other hand, India needs to maintain easy access to the US financial system and to do so it must aim to comply with the US sanctions policy. Like China, India has also lost access to 300,000 barrels per day of crude from Venezuela. It is aiming to purchase more oil from the US, Mexico, Azerbaijan and the Arabian Gulf, but replacing nearly 600,000 barrels per day of Iranian crude is a major undertaking. It seems that the economies of China and India are both vulnerable to the tightening oil market and uncertainties over supplies later this year, when US sanctions against Iran will start to bite.


Oil prices ‘likely to remain static despite output cuts’

Updated 01 October 2020

Oil prices ‘likely to remain static despite output cuts’

  • Survey points to uneven recovery with demand under threat from rising coronavirus cases

BENGALURU: Oil prices will stay near current levels this year as rising novel coronavirus cases threaten to slow the pace of demand recovery and counter output curbs by top producers, a Reuters poll showed on Wednesday.

The survey of 40 analysts and economists forecast benchmark Brent crude averaging $42.48 a barrel in 2020. That compares with an average of $42.54 this year and last month’s forecast of $42.75. Brent is projected to average $50.41 in 2021.

The 2020 US crude price outlook was at $38.70 per barrel versus $38.82 predicted in August. It has averaged $38.20 this year.

“As long as there is no working vaccine available, the main risk for oil prices is lower-than-expected demand,” Hans van Cleef, senior energy economist at ABN Amro said.

Global demand was seen contracting by 8 million-9.8 million bpd (barrels per day) this year, slightly less bleak than the 8 million-10 million bpd consensus last month.

“Demand recovery should still continue in our view, although at a slower pace with the easiest demand gains behind us,” said UBS analyst Giovanni Staunovo.

The recovery “will remain uneven”, he added.

Brent prices are on track for their first monthly decline in six as rising coronavirus infections across many regions, including Europe and the US brought new restrictions, while global cases surpassed 33 million.

The International Energy Agency this month cut its 2020 demand forecast by 200,000 bpd to 91.7 million bpd.

But production cuts led by the Organization of Petroleum Exporting Countries (OPEC) and its allies will offer some support to prices, analysts said, with the group curbing output by 7.7 million bpd.

“We suspect compliance with the OPEC+ deal will remain patchy but doubt that this will prevent the group from extending or even deepening its output cuts later this year,” Capital Economics analyst Caroline Bain said.