The energy complex recovered further from its post-OPEC slump yesterday as market players shifted their focus back to tightening oil fundamentals. Morgan Stanley said that the oil market will experience a stronger deficit in 2H21 than 1H21. As a result, it expects Brent to trade in the mid-to-high $70s over the remainder of the year. Echoing this sentiment was Barclays. The bank raised its 2021 oil price forecasts by $3-5/bbl on expectations of a faster-than-expected drawdown in OECD oil stocks. It is fair to say that “tight” has overtaken “uncertainty” as the current buzzword of the oil market.

Against this bullish backdrop, Brent and WTI rose about $1.50/bbl on Thursday and in doing so capped a remarkable turnaround. The two leading crude markers have come full circle since Monday’s rout and are back to where they were at the start of the week. Clearly, oil bulls are back in town. But that is not to say that virus concerns have completely vanished. Upside potential remains at the mercy of the stubborn Delta variant of the Covid-19 strain. Monday’s price collapse may be a distant memory, but the oil market is by no means out of the Covid woods.

The Comeback King

Recent OPEC+ shenanigans and virus concerns have shifted the focus away from a host of looming risk events. But now that these have been put on the back burner, the focus will turn back to these price wildcards, chief among which is the unrestricted return of Iranian oil supply. The pending resumption of US-Iran nuclear deal negotiations and potential lifting of sanctions is on the cusp of taking centre stage in the oil world.

Tehran and US President Joe Biden’s administration have been in indirect talks in Vienna since April to try and revive the 2015 agreement. Yet several rounds of talks have yet to yield a breakthrough. However, a seventh – and possible final – round of negotiations in Vienna is expected to convene around mid-August once President-elect Ebrahim Raisi has been sworn in as president. Several big issues still need to be resolved although these are not seen as insurmountable.

Accordingly, there is cautious optimism of a deal being reached, perhaps as early as September. Western powers have expressed confidence in a deal despite the election victory of a hardline Iranian president. And while Raisi’s administration is likely to toughen the country’s stance against the West, it is not expected to stand in the way of a deal. The Iranian leadership is more eager than ever for sanction relief in order to secure much-needed hard currency to help revive its depressed economy. As things stand, the will is there among key stakeholders for a new Iranian nuclear agreement.

Small wonder, then, that Iran’s oil industry is eyeing an end to sanctions. It has been pushing more oil onto the market even as sanctions remain in place. The latest OPEC monthly report put Iran production at 2.47 mbpd in June, up by 500,000 bpd since Donald Trump got the boot in November but still around 1.5 mbpd down on the pre-sanction level. All the while, in a further sign of its intent, Iran has boosted its oil export capabilities this week with the opening of its first oil export terminal in the Gulf of Oman. The new facility allows 350,000 bpd to be exported and is expected to ramp up its capacity to 1 mbpd over the next five months.

Clearly, Iran is positioning itself for a big increase in supply. And should an agreement be reached, the OPEC nation should have little problem ramping up its exports fairly rapidly, because of the massive volumes of crude and condensate it has built up in onshore and offshore storage. The IEA estimates that Iran has about 59 million bbls of crude and condensate stored on tankers. Meanwhile, Iranian onshore crude inventories are estimated at around 70 million bbls, according to energy consultancy FGE. Iran would likely seek to sell these stockpiles quickly if Washington lifts sanctions.

The prospect of higher Iranian supply in the final quarter of this year therefore cannot be ignored. At the same time, it is not likely to jeopardise the supply deficit pencilled in for the remainder of the year. A strong demand outlook for the second half means that Iranian barrels are still likely to find takers. And sure enough, previous buyers of Iranian crude including Indian and European refiners are already said to have made room for Iranian oil in the coming months. Additional Iranian barrels should therefore be swiftly absorbed by the market, even accounting for the gradual return of OPEC+ supply. When, and not if, Iranian sanctions relief is granted, those of a bullish disposition can rest easy that it will not change the supportive state of the near-term global oil balance.