Oil Futures Drop on Iran Progress

WASHINGTON (DTN) -- New York Mercantile Exchange crude oil futures nearest to delivery and Intercontinental Exchange Brent futures settled sharply lower Tuesday, with both benchmarks tumbling nearly 3% in response to a fading geopolitical risk-premium in the Middle East after U.S. Secretary of State Mike Pompeo indicated substantial progress towards reaching a nuclear deal with Tehran.

Oil futures nosedived after Secretary Pompeo said Iran is ready to negotiate on the missile program, easing concerns over military confrontation in the heart of the oil producing region. The comments also suggest a possible removal of U.S. sanctions on Iranian crude oil exports, which plunged to multi-year low since U.S. withdrew from Obama-era nuclear deal. Previously, Iran's Foreign Minister Mohammad Zarif said opportunity to negotiate is "wide open," if the U.S. removes a series of harsh sanctions placed on Tehran since 2017.

Oil prices expanded geopolitical risk-premium this summer in response to rising tensions in the Middle East, which nearly escalated into a retaliatory U.S. attack against Iran's military targets last month. Some analysts believe that risk premium was worth at least couple of dollars per barrel and is now fading from the investors' calculations after Trump explicitly said he was not looking for regime change in Tehran.

Additionally, market sentiment grew increasingly bearish after the White House this afternoon said resolution to the U.S.-China tariff dispute has a "long way to go" and tariffs on the remaining $325 billion of Chinese goods could still go into effect. According to wire services, trade negotiations between the two countries hit a rough patch after China unexpectedly added a new member to the negotiating team -- the country's commerce minister, Zhong Shan, considered by many in Washington as an economic hard-liner. Oil markets grew increasingly concerned that years-long trade frictions between the world's two largest economies would chip away at global economic growth and by extension oil demand.

Oil futures came under selling pressure Monday as production in the Gulf of Mexico began post-storm recovery and concerns over lost demand in regard to Hurricane Barry took center-stage. Wire services report that the storm only caused a short-lived halt to offshore production and tanker traffic, while the real impact on gasoline and crude contracts may come from prolonged period of heavy flooding and reduced economic activity in the region.

Tuesday's lower settlements also come in front of weekly supply data, beginning with the American Petroleum Institute report at 4:30 p.m. EDT and followed by official government figures due to be published 10:30 a.m. EDT on Wednesday, July 17. Market participants expect large draws in U.S. stockpiles last week after Barry disrupted oil flow in the GOM. However, some analysts believe calls for inventory declines have already been baked into the futures price and unless there is a much larger-than-expected draws, the data would have a muted effect on oil price direction for the rest of the week. Market participants expect U.S. crude oil inventories declined 4.2 million barrels (bbl) in the week ended July 12, while gasoline stockpiles fell 1.5 million bbl and distillate supplies build 300,000 bbl in the profiled week.

NYMEX August West Texas Intermediate plunged $1.96 to settle at $57.62 bbl, while ICE September Brent crude collapsed $2.13 to $64.35 in the market-on-close trading.

NYMEX August RBOB futures tumbled 3.85 cents, or 1.36%, to settle at $1.8918 gallon, a fresh two-week low. NYMEX August ULSD futures were down 4.67 cents, or 2.06%, to a $1.9049 gallon settlement.

Liubov Georges can be reached at liubov.georges@dtn.com

(BAS)