Those of a bullish disposition made another beeline for the exits yesterday, so much so that oil prices fell to the lowest since the start of Russia’s war on Ukraine. WTI plunged into the $80s while Brent finished the session below $95/bbl. At the heart of the pullback is the prospect of declining demand amid a global economic slowdown.

Sure enough, yesterday brought with it a fresh batch of red flags for the world economy. The Bank of England forecast that the UK economy will start shrinking in the fourth quarter of this year, and then keep contracting through next year. This gloomy prognosis came as the Bank announced its biggest interest rate rise in 27 years. Meanwhile, the number of Americans filing new claims for unemployment benefits increased last week to a six-month high amid growing signs the historically tight labour market could be cooling. Investors will be bracing for today’s non-farm payroll report for further clues on the health of the US labour market. Job growth is expected to have slowed in July with the addition of 250,000 positions after rising by 372,000 in June.

Selling pressures were provided with a further tailwind as Iranian nuclear talks resumed in Vienna. Both sides played down the prospect of a breakthrough, although Iran will be viewed as an even bigger lifeline for the oil market following OPEC’s paltry increase. Add in the lingering negative afterglow of Wednesday’s EIA stock report and oil prices were a dead cert to finish in the red yesterday. As things stand, the two major crude markers are on track for a double-digit percentage loss this week. One can only wonder how much longer the supply tightness will be lost on market players.

Goodbye Saudi Arabia. Hello Iran.

Goodwill gesture or slap in the face. Call it what you will, OPEC’s meagre supply hike for next month will not have a material impact on the supply balance. The latest supply hike agreed by OPEC+ is equivalent to just 0.1% of global oil demand. And that assumes that the full extra 100,000 bpd will be delivered next month, which is highly unlikely. Most OPEC+ members are pumping at maximum capacity and still struggling to meet existing production goals. Only Saudi Arabia and the UAE are able to raise their oil production and their quotas for September have increased by 24,000 bpd and 8,000 bpd, respectively.

OPEC’s underwhelming headline increase was attributed to limited spare capacity. In its press release, the oil cartel categorized spare capacity availability as “severely limited”. By most estimates, the group’s current emergency cushion stands at just over 2 mbpd. Moreover, OPEC said that this must be used with “great caution” in response to severe supply disruptions. This caution is why OPEC cannot be relied on to provide more production to lower oil prices. Better said, the producer group has lost its ability to effectively manage the oil market.

The market has all but lost faith in OPEC+ to meaningfully lift production. However, the first rule of life and business is to always have a Plan B. It, therefore, comes as little surprise that shortly after OPEC announced its minuscule increase, officials from both US and Iranian governments said they would resume talks on reviving the 2015 nuclear pact. Negotiations will restart in Vienna later this week, rekindling a long-running process that stalled in June. The global energy market is still facing supply shortages hence the newfound sense of urgency in reaching an agreement.

Tehran has the capacity to boost exports by more than 1 mbpd if a nuclear deal is achieved and US sanctions lifted. What’s more, Iran’s oil minister said on Thursday that it is ready to return its crude oil production to pre-sanctions levels at the earliest possible time. He also urged Western governments to adopt a practical approach to ensuring global energy supplies in the coming months.

It’s a well-known fact that US President Joe Biden favours a return to the deal, a legacy from the Obama-Biden administration. Yet there are still many obstacles that need to be overcome, chief among which is Washington’s refusal to reverse the blacklisting of the Islamic Revolutionary Guards Corps as a terrorist organization. Meanwhile, Iran is pressing ahead with enrichment work with the installation of advanced centrifuges at its Natanz fuel enrichment plant. What’s more, monitoring cameras belonging to the UN’s nuclear watchdog, the IAEA, will not be turned back on until an agreement is reached. And earlier this week, the US issued new Iran-related sanctions against several entities involved in the country’s oil and petrochemical trade.

Both sides have their work cut out to strike a breakthrough. That being said, the latest rapprochement between Western powers and Iran has taken on a new degree of importance. This is because the oil market may be headed for a potential year-end supply crunch. OPEC+ production constraints, lacklustre US shale output, Russian production at the mercy of Western sanctions and the impending loss of 1 mbpd in US SPR releases has the makings of a supply shock. Now, more than ever, Iranian sanctions relief is needed to help restore balance and calm to the oil market.