Oil Futures Rally as Iran-IAEA Deal Expires, Demand Rebound

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- At the beginning of a new trading week, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange leaped higher after Iran's hardline parliament failed to grant a one-month extension for an agreement that allows oversight of the country's nuclear facilities by United Nations inspectors, undermining efforts of the Biden administration to reach a deal with a moderate Rouhani government before the presidential elections next month.

Gains in the oil complex early Monday were underlined by political developments in Iran where the hardline speaker of the Parliament, Mohammad Bagher Qalibaf, announced over the weekend a temporary deal between Tehran and International Atomic Energy Agency has ended, delivering a blow to a diplomatic push to hammer out an atomic accord with western powers. The IAEA struck a three-month deal with Iran in February to have it hold the surveillance images of some two dozen sites, with Tehran threatening to delete them afterward if no deal had been reached.

Without an oversight agreement between the IAEA and Iran, the prospects of a broad nuclear deal with the western powers is now highly unlikely, meaning no immediate relief from the U.S. sanctions. Speaking Sunday, U.S. Secretary of State Antony Blinken said, "What we haven't yet seen is whether Iran is ready and willing to make a decision to do what it has to do. That's the test and we don't yet have an answer."

Iran has been steadily reducing its compliance with the nuclear deal, saying its steps were justified in response to the United States withdrawal from the 2015 Joint Comprehensive Plan of Action in 2018.

Last week, oil markets were rocked by an apparent breakthrough in multilateral talks in Vienna, with Iranian President Hassan Rouhani saying on May 20 that the "main agreement" has been reached, with the United States committing to lifting sanctions targeting Iran's oil, petrochemicals, and shipping. If a deal is realized, S&P Platts estimates Iranian crude and condensate exports would grow from 800,000 barrels per day (bpd) in April to 1.4 million bpd in December and 2 million bpd by July 2022.

According to Organization of the Petroleum Exporting Countries' monthly survey, Iran's output stood at 2.43 million bpd in April -- an increase from about 2 million bpd at the end of 2020, as Iran has found increased buying interest from China, according to market sources.

Investment bank Goldman Sachs, however, expects OPEC and Russia-led allies to offset a projected ramp-up by halting for two months its 500,000 bpd monthly rate of production increase in the second half of 2021, leaving "the destocking path unchanged for an only modest slowdown in the pace of its excess capacity normalization."

"Our updated base-case is that the recovery in Iranian production will start in October (earlier forecast June 2022), reaching 3.5 million barrels per day (mb/d) after six months," said the Wall Street investment house. Goldman Sachs still expects Brent to hit $80 per barrel (bbl) this summer, driven by a broad-base pick-up in economic activity and mobility across the United States and Europe.

In outside markets, U.S. dollar hovered near three-month lows, trading 89.885 against a basket of foreign currencies, with investors looking towards Friday's release of U.S. Personal Consumption Expenditures data -- a preferred gauge of inflation for the U.S. Federal Reserve. Market's consensus calls for April's PCI index to fall back 14.8% from March's stimulus swollen 21.1% spike. Personal consumption expenditures, after March's 4.2% rise, are expected to rise another 0.6% in April.

In early trading, NYMEX July West Texas Intermediate rallied $0.93 to trade near $64.52 bbl, and the international crude benchmark Brent contract for July delivery advanced $0.97 to $67.42 bbl, paring gains following an overnight rally. NYMEX June RBOB futures surged 2.99 cents to $2.0984 gallon, while June ULSD futures gained 2.12 cents to $2.0094 gallon.

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

Liubov Georges