Oil has worst week in more than a month with potential comeback in Iran
(Bloomberg) – Oil benchmarks suffered their worst week in more than a month as the market considered the consequences of a possible nuclear deal that could lift US sanctions on Iranian crude.
WTI New York futures fell 2.7% on the week, the worst performance since early April. Brent recorded the largest weekly drop since March, amid a possible return of millions of barrels per day of Iranian crude to the market. President Hassan Rouhani said this week that world powers have agreed to major sanctions being lifted as part of any nuclear deal.
“There are concerns about the additional amount of supply from Iran,” said John Kilduff, a partner of Again Capital LLC. “The prospect of a bigger Iranian bid has been a killer.”
Some analysts estimate that Iran could return to pre-sanctions production of nearly 4 million barrels a day in as little as three months. Iranian oil production has increased this year and was around 2.4 million barrels per day last month, according to estimates compiled by Bloomberg.
The key to knowing whether the potential increase in Iranian production upsets declines in global inventories is the country’s delay in returning to the oil market, Deutsche Bank analyst Michael Hsueh said in a note. While the third-quarter deficit is only 1.2 million barrels per day, the market is better equipped to handle the additional production the following quarter, when that deficit is likely to be larger, he wrote.
“The most pressing question will be to what extent an early Iranian rise to power could hurt the third quarter sales,” Hsueh wrote. “The timing of the ramp-up will be primarily a matter of policy and negotiation,” as Iran’s offer “may be introduced to the market before an actual increase in production.”
Oil was also caught in a wider sell-off this week in the commodities and equity markets following concerns about inflation. Hedge funds reduced their net bullish position in WTI and Brent for a second week in a row, according to weekly data on ICE Futures Europe and CFTC futures and options for four contracts.
The string of losses this week tested the boundaries of the current oil trading range, with benchmarks finding technical support after falling to their lowest since April. Brent traded in a band of around $ 5 over the past month, falling $ 70 a barrel, but prompting to buy more as it moved closer to $ 65.
Before the sanctions were implemented, Iran produced around 3.8 million barrels per day of crude. Only the production of Iraq and Saudi Arabia exceeds this amount within the Organization of the Petroleum Exporting Countries. Still, Citigroup Inc. believes aggregate global demand is strong enough to absorb any additional supply, including from Iran, and prices will continue to rise.
Meanwhile, the rapid spread of Nymex gasoline futures entered a sharp contango on Friday, reflecting expectations that fuel markets could be overloaded.
“The spread of gasoline that threatens to go into contango means that the gasoline market is overloaded before Memorial Day weekend, and that’s a negative price movement,” said Bob Yawger, chief of staff. the futures division at Mizuho Securities. “The inflation situation has also started to scare some people, with prices at the pump getting a bit high.”
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