Who would have thought that a small EU nation with the population of less than 9 million will provide a (possibly short-term) relief for central bankers as well as consuming countries that suffer under high oil prices? After Austria announced a nationwide lockdown on Friday the market went into freefall. As the NYMEX RBOB contract dropped $3.46/bbl equivalent inflationary pressure eased and you could almost hear the sigh of relief from the White House.
Of course, Austria is only one piece of the European Covid puzzle and was the trigger point behind Friday’s stampede towards the exit. Infection rates are at record highs in several other countries, including Germany and the prospect of countrywide lockdowns raised concerns about economic and oil demand growth. Safe havens, like the dollar, were sought-after contributing to the sharp decline oil prices.
The market reaction was clearly instinctive and only the very short-term impact of the potential lockdowns was kept in focus – the Austrian lockdown is scheduled to last for three weeks. The fact that the European Medicine Agency approved the antiviral pill for Covid-19, Lageviro, which significantly reduces hospitalisation and death risk of the virus, for EU wide use went unnoticed. The Austrian government also plans to make coronavirus inoculations mandatory. Despite scientific evidence of the effectiveness of Covid vaccines the staunch opposition of anti-vaxxers make the re-introduction of lockdowns and the mandatory vaccination a political mine field. For this reason, the move has to be lauded as it would ensure that the recovery out of the pandemic will continue, probably well before the winter season passes.
High oil prices do not only raise concerns of protracted inflation but also dent approval ratings of politicians. When that is the case then the end justifies the means – hence the co-ordinated effort, led by the US, to intervene in the natural functioning of the market and release SPR barrels, that are stockpiled for emergencies, to the market to bring prices lower. As the OPEC+ producer group has refused to increase output ahead of the traditionally low demand first quarter of next year maybe this is the last resort for consuming nations to act. Flooding the market with extra barrels from inventories is no equivalent to releasing them from the ground. The former has to be replaced some time in the future and therefore its effect should be brief. Nonetheless, it is unambiguously playing its part in the current weakness. The combined impact of planned lockdowns in Europe and the possible release of SPR barrels, however, might bring forward the price correction that was expected to take place at the beginning of next year and given the structural deficit in the oil balance further dips might just prove an irresistible buying opportunity for those who anticipate a supply crunch as the transition from fossil fuel to renewable unfolds.
Last chance saloon
Everybody is predicting a surplus of supply starting from next year. The only question is the exact extent of that surplus. Much of this will inevitably depend on OPEC’s future plans. But another important factor will be the Iranian wildcard. Talks between world powers and Tehran on reviving the 2015 Iran nuclear deal are set to resume a week from today after a five-month hiatus. Oil traders will be watching closely as a successful resolution to the standoff would let that nation sell its oil openly again.
The announcement of a seventh round of talks can’t come a moment too soon for the OPEC nation. Western powers have warned repeatedly that the window of opportunity for a deal is closing fast. All parties involved recognise the deal’s win-win nature and expressed optimism that outstanding issues could be resolved swiftly. Yet despite this positive rhetoric, the upcoming negotiations will be anything other than straightforward.
The summer election of conservative President Ebrahim Raisi in Iran has complicated the situation. That’s in part because negotiators selected by Iran’s new hard-line leadership openly oppose the nuclear deal. Furthermore, Tehran’s tougher stance means they are likely to make extreme demands, including disagreements on the scope of sanction relief. And sure enough, Iran recently said all sanctions imposed by the Trump administration to be lifted, including measures not directly related to the nuclear file. What’s more, it also wants a guarantee that no future president can withdraw from the agreement and mechanisms to verify sanctions relief. This is despite the fact that Joe Biden cannot bind the hands of future US administrations.
These excessive demands may suggest that Iran considers the US weak at the moment. After all, the world’s biggest economy is grappling with inflationary pressures brought on by surging energy prices. And both sides are well aware that Iranian sanctions relief would go a long way to relieving pressure on oil prices and therefore inflation. Thus, Iran could be forgiven for thinking it holds the advantage and that the outcome of talks ought to be in its favour. But the hardening in strategy on its part will most likely lead to deadlock.
All the while, throwing another spanner in the works is the fact that Tehran continues to advance its nuclear program. Iran has increased its stockpile of enriched uranium to more than 10 times the limit imposed by the JCPOA, according to the IAEA. Furthermore, Iran is still denying inspectors full access to nuclear facilities. In its latest quarterly report, released last week, the U.N. nuclear watchdog revealed that it still did not have access to re-install surveillance cameras at certain sites. It also reported that where its inspectors were permitted limited access, they were subjected to excessive security measures by authorities in the wake of alleged sabotage.
Simply put, trust between Western powers and Iran is still in short supply. Meanwhile, tensions continue to simmer between the US and Iran. Earlier this month, the Pentagon accused Iran of ‘unprofessional’ conduct near a US Navy ship in the Gulf of Oman. The prospect of similar incidents in the Middle East cannot be discounted.
All of this leaves little optimism for a breakthrough at the upcoming nuclear talks. The odds are stacked against an Iran nuclear deal being reached this year. Talks will most likely drag out into the new year. And even then, there is no guarantee that a new agreement will be forthcoming. The upshot is that additional Iranian oil volumes will not be entering the market any time soon. This, in turn, should give OPEC+ one less thing to worry about as it contemplates how best to address a looming oversupply.