There was a great deal of optimism on all sides following a fifth round of talks between US, EU, International Atomic Energy Agency (IAEA) and Iranian officials. Comments this week from a variety of participants highlight the rapid progress made to date with the caveat that key issues remain to be sorted out. Increasingly it looks like sanctions will be eased, and that more Iranian crude exports will hit the market, in the back half of the year.
Importantly, it also appears that the volume of new Iranian exports being discussed in 2H 2021 will not be enough to tip the global balance into surplus. As such, global destocking will continue. Note that prompt WTI this week reached a two-year settlement high after the most recent update on negotiations with Tehran. This provides a compelling argument that the latest views on sanction removal are already discounted into pricing.
In research this week Goldman Sachs is calling for $80.00 Brent and suggests the case for higher oil prices “remains intact” even with the return of Iranian supply in 2H 2021. A few days earlier Citigroup research suggested that Washington was going to allow an initial 500,000 bpd increase in exports from the middle of 3Q. Like Goldman, Citi said additional Iranian supply is not expected to tip the global balance back into surplus. Citi research also noted that Iranian exports had already climbed from 250,000 bpd in 1H 2020 to 850,000 bpd at present. We would stress these volumes were readily absorbed.
Rapidly evolving demand recovery has also overshadowed the Iranian nuclear negotiations as more and more economies bounce back from COVID slowdowns. In the US, the focus is on gasoline demand, extremely low gasoline inventory cover, and refiners’ struggles to boost crude runs as we head into the long Memorial Day weekend. As a reminder, Memorial Day weekend is the symbolic kickoff for peak US summer driving season.
Likewise, air travel is also starting to gear back up heading into summer. Bloomberg reported that flight departures in the Eurozone have increased by 11% week-on-week led by UK, France, Germany, and Turkey. Following months of anemic demand, “… flight numbers are likely to more than double in the coming few months as peak travel season arrives.”
It is important to recognize that the demand recovery is unfolding earlier and faster than macro supply side adjustments. For its part OPEC delayed the start of its supply increases from January to May with the Saudi unilaterally cutting an extra 1 million bpd in February, March, and April. The recovery in US shale remains sub-par with production stuck near 11 million bpd with the average forecast for 2021 production now below 2020 levels. Likewise, any incremental Iranian exports are not likely to be available until 3Q or later.
OPEC+ is already signaling it is likely to maintain the status quo as its technical and market committees prepare to meet next week. Last month OPEC+ laid out, and agreed to, a transparent three-month schedule of quotas to increase production 600,000 bpd per month during May, June, and July. To date, progress in the Iranian nuclear talks/sanction removal has not prompted OPEC to alter its course. Importantly it has also not dented the resiliency for both fixed price crude and forward term structure.