Market tightness leaves oil prices exposed to geopolitical risks

Over the past few days, reports that a deal to renew the Iran nuclear agreement might be close, sent oil prices lower, with the escalation of tensions over the conflict between Ukraine and Russia not offering significant support.

Oil prices ended with their first weekly decline in nine weeks, although the uncertainty surrounding Russia and Ukraine may change that. On Friday, the benchmark West Texas Intermediate was trading at $91.07 a barrel, down 2.2 percent, and Brent was down about 1 percent to $93.54.

Indeed, the positive news about negotiations between Iran and the US contributed to the easing of oil prices, as the possibility of new crude supplies will reduce the supply-demand deficit.

The US State Department said last week that it was in the final stages of talks, and Iran’s chief negotiator tweeted last week: “After weeks of intensive talks, we are closer than ever to an agreement.”

In parallel, news emerged that Asian refineries are in cautious talks with Iran to resume oil imports if a deal is reached. Asian refineries were major importers of Iranian oil until 2019, when sanctions on Iranian oil came into full force. However, it may take two to three months for oil purchases from Iran to resume after a deal is concluded.

Compared to summer 2018, Iran’s production level is now down by 1.3 million barrels per day. Most of this volume may return to the market before the end of the year. According to Rystad Energy, by December 2022, Iranian production growth could reach 900,000 bpd. This value corresponds to about 0.9 percent of global demand and may increase the surplus estimate in 2022 to 1.6-1.7 million bpd.

Besides Iran, weekly Energy Information Administration statistics showed a continuous drawdown of crude oil inventories in Cushing, maintaining the trend seen in 2022 to date. Cushing’s storage is now at its lowest level since September 2018, putting upward pressure on the WTI benchmark.

Meanwhile, the total US commercial crude stocks showed an unexpected increase of 1.1 million barrels, while stocks of petroleum products (gasoline and middle distillates) decreased by 2.9 million barrels. But total fuel supply, an indirect indicator of demand, jumped 900,000 bpd to 22.7 million bpd. Thus, despite the growth in crude oil stocks, the stats look positive and indicate that strong demand is being maintained.

In fact, global demand is recovering rapidly. The omicron variant, though it affects restrictions in some countries, has not led to major shutdowns. Industrial activity continues to grow, and international flights are gradually recovering.

According to OPEC estimates from the market report for February, global oil demand will grow by 4.15 million bpd in 2022 to 100.8 million bpd, while the mark of 100 million bpd will be exceeded in the third quarter of 2022.

OPEC is ready to increase production by 1 million bpd on an annual basis to 28.92 million bpd. In addition, in the coming months, OPEC + is likely to leave the planned monthly increase of 400,000 bpd.

Under these fundamentals, the oil market should be balanced in 2022, though there is still a risk of a supply deficit as OPEC+ systematically defaults to its production plan.

At the moment, the keyword in the market is “maybe.” The problem is that, lately, nothing is going according to plan. This is especially true of the increase in OPEC+ production. On paper, the group is carefully adding 400,000 bpd each month, but real production is seriously behind the plan. According to the International Energy Agency, the difference in January was 900,000 bpd.

Iran is not the case here, as it would be happy to ramp up production quickly. On the other hand, does anyone know exactly what the state of its oil fields is after several years of closure?

The markets are understandably reacting to the news and pricing in the possibility of a nuclear deal and its consequences, but there are still many obstacles standing in the way of an agreement. In addition, Iranian oil is not expected to enter the market in the first half of 2022. Thus, in the short term, bullish sentiments in the oil market will remain. At the same time, it is worth noting that the uptrend is still in effect, and in the absence of news on the Iran deal, there are still opportunities for a temporary recovery.

With all these developments, we must not forget Iran’s neighbors. If for European or American politicians Iran’s nuclear program is only a concern, and the real pain is related to gas station prices and consumer bills for electricity, the countries of the Middle East have very different priorities.

Solving the short-term problem of lowering oil prices from close to $100 a barrel could lead to another, much more serious problem within a year or two, or even before that, now everything in the world is changing rapidly. On the other hand, there is something to be done as oil prices rise. The price of error on the Iran issue, though, is too great for the entire Middle East, the world, and the oil market.

• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.