Could Iranian Barrels Spoil the Current Rally?

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Crude oil prices moved away from recent highs in Monday trading on prospects of a breakthrough of sorts in nuclear negotiations with Iran.

West Texas Intermediate (WTI), the U.S. benchmark for the price of crude oil, was flirting with a loss of about 1% early in the Monday session to trade in the lower $91 per barrel range. WTI broke through the psychological $90 threshold last week on the back of a geopolitical risk premium and seemingly chronic supply-side issues.

The prospect of war between Western allies and Russia over Ukraine would jeopardize the vast network of Soviet-era pipelines running through Ukraine. Those pipelines include a section of Russia's Druzhba crude oil pipeline, among the largest in the world.

Crude oil prices last week ticked higher even after the Organization of the Petroleum Exporting Countries and their partners, a group known as OPEC+, agreed to put another 400,000 barrels per day on the market beginning in March. That decision was widely expected, though OPEC+ has been unable to keep pace with its own production guidance.

Apart from logistical issues, many OPEC+ members are in a state of turmoil. Nigeria, among Africa's largest producers, is no stranger to conflict, and recent political violence in Libya has curtailed production there. Meanwhile, the Iranian-backed Houthi rebels are, according the London oil broker PVM, pounding the UAE with missiles like they were confetti. Venezuela, a founding member of OPEC, has been unable to produce much of anything due to both its delapidated infrastructure and U.S. sanctions.

U.S. sanctions, however, may be behind Monday's retracement for crude oil prices. On Friday, the U.S. State Department restored sanctions waivers that would allow third parties to play a role in Iranian nuclear research programs.

Ned Price, a State Department spokesperson, insisted, however, that this was not a reward for Iran, and Tehran, for its part, said the relief is not enough. Nevertheless, eight rounds of negotiations between Western powers and Iran may be paving the way for a return to an agreement that curtailed many of Iran's nuclear ambitions.

And whether the U.S. decision is an explicit concession or not, it shows the many challenges that U.S. President Joe Biden faces in controlling runaway inflation for energy goods. The prices for crude oil, gasoline and other refined petroleum products are accelerating at a far faster pace than other consumer goods, but this administration has so far been unable to arrest the climb.

Biden last year opened up the Strategic Petroleum Reserve to calm commodity markets, but to no avail. Apart from negotiations with the Kremlin over Ukraine and indirectly with Tehran, the Reuters news service reported Friday that the Biden administration may let U.S major Chevron (NYSE:CVX) (San Ramon, California) trade in Venezuelan oil to recover unpaid debt.

For a market coping with long-running supply-side issues, even the slightest hint of a breakthrough on any front is enough to eat into the geopolitical risk premium supporting the price of oil.

An actual handshake with Tehran could see the return of at least 1 million barrels per day of Iranian crude oil within the next six months or so. While the return of physical production might be delayed, Iran boasts considerable floating storage capacity that would allow it to put more barrels on the water in a short time.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn.