Another day, another decline. Brent lost 53 cts/bbl yesterday while WTI settled down 94 cts/bbl after playing catch up with Monday’s losses as it returned from the Labour Day Holiday. Upside potential appears to have been expunged by the bearish afterglow of the latest Saudi price cuts. On Sunday, the OPEC kingpin slashed oil prices to Asia by around $1/bbl and in doing so cast a shadow over the region’s near-term demand outlook. The energy complex has also been pressured of late by a rejuvenated dollar. The dollar index advanced for a second session in a row on Tuesday as it recovered further from its post-payrolls low.

Losses, however, were capped by signs that China has rediscovered its appetite for foreign oil. Crude imports rose above 10 mbpd in August for the first time in five months as refiners resumed buying. This robust showing will go a long way to calm some worries over China’s economic slowdown. All the while, ongoing US supply disruptions caused by Hurricane Ida offered support. Around 79% of offshore crude production in the Gulf of Mexico remained offline on Tuesday, equivalent to around 1.44 mbpd. This puts US oil losses from Hurricane Ida among the worst since Katrina in 2005. Efforts to redeploy staff to facilities in the region are ongoing, but it seems that volumes will be affected for a while yet.

In the meantime, market watchers got their first taste of the fallout on US oil inventories. Analysts polled by Reuters expect draws across the board. Crude stocks likely fell by 3.8 million bbls last week while gasoline inventories declined by 3.6 million bbls. Bring up the rear are distillate fuels stockpiles which were seen dropping by 3 million bbls. Confirmation of this will be provided by tomorrow’s delayed release of government data.

The Iranian waiting game

Three months have passed since Iranian nuclear deal negotiations were suspended in mid-June following Ebrahim Raisi’s election win. A seventh round was expected to start after Raisi’s August 5 inauguration but has thus far yet to be announced. Since then, efforts to resume nuclear talks have been complicated by a flare-up in tensions between both sides. Iran was blamed by western powers for two attacks on oil tankers in the Arabian Sea/Gulf of Oman area. To make matters worse, Iran has continued to increase production of high-enriched uranium while failing to resume full cooperation with nuclear inspectors.

Now though, there are fresh attempts at getting the ball rolling. Last week, European parties to the nuclear deal urged Iran to return to the negotiations as soon as possible. The president of Iran subsequently said that the country was ready to resume nuclear talks. Crucially, there was the first suggestion from the new Iranian government of when talks will resume. Iran’s new foreign minister hinted that the country’s return to the nuclear-deal negotiations could be two or three months away, potentially pushing back any restoration of the country’s crude exports. Even so, Iran seems determined to boost oil exports despite the lack of sanctions relief. According to new oil minister Javad Owji, Iran’s priorities are to strengthen its position in OPEC and take back its markets. He went on to claim that “good things will happen regarding Iran’s oil sales in the coming months”, without elaborating on how Tehran planned to overcome sanctions.

Yet despite this bravado, a significant recovery in exports does not appear to be on the cards for 2021. Aside from the lack of sanctions relief, Iran faces an increasingly competitive environment with more OPEC+ crude coming onto the market. And this is a blessing for the oil balance. As things stand, the market is able to absorb the additional supply from OPEC+ but the same can’t be said for returning Iranian barrels.

That being said, Iran will likely continue its policy of steadily ramping up crude oil production in anticipation of an unrestricted return to the oil markets. According to OPEC-surveyed secondary sources, Iranian oil output increased for the 9th consecutive month in July by a combined 532,000 bpd to 2.5 mbpd. Additional barrels will either be channelled into storage or sold to China, the only customer that currently dares skirt existing American sanctions on Iranian oil exports.

An official from the National Iranian Oil Company recently said that Iran could ramp up production to levels close to pre-sanction output of around 3.9 mbpd within a month after the sanctions are lifted. Yet this is far from the truth. Huge investment is needed to bring back production to pre-sanction levels. Experts predict an investment of at least $15 billion is needed just to maintain the current level of production.

Even so, Iran is clearly positioning itself to increase output, albeit only gradually. While the outlook for Iran’s oil production is skewed to the upside, no meaningful gains are expected in the absence US sanctions are lifted. Washington’s recent call on OPEC to boost supply suggests that it does not envisage a swift return of Iranian barrels.  The Iran factor is therefore likely to be put on the back burner, at least for the time being. Iran is no longer the oil market’s wildcard but expect it to make a comeback in the early part of 2022.