(Bloomberg) — Oil declined on signs of progress in US-Iran peace talks including a waiver on some Iranian oil sanctions, bolstering hopes for a continued recovery in flows from the Persian Gulf.
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Brent crude traded around $77 a barrel while West Texas Intermediate’s most active contract was near $73. The US issued a license allowing the sale of some Iranian oil and petroleum products for 60 days, citing “productive talks” in Switzerland.
Transits through the Strait of Hormuz have also ticked up, even after negotiations got off to a rocky start. Shipping data compiled by Bloomberg showed millions of barrels of oil flowing through the chokepoint over the weekend. Iran has also ramped up the amount of oil it sends openly through Hormuz to the highest since the war began, and slashed prices for cargoes offered to China.
“Hormuz transits are going to be treated a bit like a proxy for progress on physical oil and at diplomatic level to a degree,” said Neil Crosby, head of research at Sparta Commodities. “And the direction of travel — i.e. rising — is most important for now.”
The war in the Middle East choked off supply in a region responsible for a third of the world’s oil production. Crude futures have retreated in recent weeks — although prices remain slightly higher than pre-war levels — after global refiners found temporary workarounds, and as the prospect of an end to the conflict fueled optimism over a rapid return to normality.
A peace deal would in theory unleash a gush of supply in the face of weak immediate demand, especially given a slump in purchases by top importer China. About 80 million barrels of crude are set to suddenly hit the market should Hormuz fully reopen, threatening to leave refiners swamped.
The waivers, which were promised in the memorandum of understanding between the US and Iran, don’t necessarily boost widespread expectations for more supplies and lower prices in the short run, according to Rachel Ziemba, senior fellow at the Center for a New American Security.
“The big question is going to be less about Iranian supplies and more about the willingness and ability of the Gulf countries, places like Iraq that have shut in production, to scale it back up,” Ziemba said.
Persian Gulf producers are preparing for a production ramp-up, with Kuwait canceling earlier force majeure notices. Abu Dhabi National Oil Co. told customers to resume loading supply from inside the Persian Gulf, while selling spot crude in a series of tenders.
And the sanctions relief may open the door for purchases of Iranian oil in countries like India, Ziemba said. Chinese entities with lower risk appetites may also scale up purchases from the Islamic Republic under the waivers.
Still, the rush of barrels might not be enough to stave off supply concerns in the longer run. Crude and product deficits stand between three-and-a-half to four million barrels a day, according to Ryan McKay, senior commodity strategist at TD Securities.
“As the market ultimately remains tight throughout the summer, the set-up for higher oil prices remains very strong,” McKay said.
–With assistance from Serene Cheong.
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