New Iran sanctions may be the next catalyst for crude oil prices

The Trump administration has issued new sanctions on Iranian entities and individuals after the tested a ballistic missile. The sanctions, against 25 individuals and companies, add to a lengthy list of sanctions the US already has in place against Iran. The new sanctions come as some in Congress are pushing the new administration to take a harder line on Iran.

The Obama administration brokered a deal with Iran, formally known as the Joint Comprehensive Plan of Action, which resulted in the lifting of Western sanctions on Iranian oil exports a year ago. Iran has ramped up its oil production by about 1 million barrels per day since the sanctions were lifted.

Iran has said that new sanctions would breach the 2015 nuclear accord but the U.S. insists they do not. A senior Trump administration official said the new sanctions were made “outside” the JCPOA and do not impact the deal. The official said no individual or entity which had sanctions dropped under the JCPOA was impacted by the new sanctions.

The latest flare up in tensions upends a two-year compromise between the US and Iran and put the two countries back on a path of confrontation. Iran has succeeded in ramping up oil production after international sanctions were lifted a year ago, but the sudden resurgence in tensions could push up prices if things escalate. The geopolitical battle with Iran had enormous influence a few years ago, and this could be one of the major black swan events of 2017.

Analysts said the latest sanctions could be an early sign of future actions, which may impact crude flows out of Iran. While there was some initial reaction in oil markets to the sanctions, it appears to have faded since the sanctions do not at least initially impact the JCPOA.

Crude futures touched intraday highs right after news broke about the US sanctions on Iran. Prices have been hovering in positive territory since then, but off those earlier highs. March crude was 20 cents higher at $53.74/b after trading as high as $54.22/b. ICE April Brent was up 25 cents at $56.81/b, off an earlier high of $57.30/b

Oil producers satisfied with $55-$60 per barrel

Iran’s oil minister, Bijan Zanganeh, has said crude oil producers are satisfied with a price range of $55-$60 per barrel.

“Certainly if oil prices exceed $70/b, once again the balance between supply and demand will disappear and prices will fall,” Zanganeh said in response to a question about a fair price for oil.

The balance between supply and demand was “not perfect”, but is projected to continue improving through 2017, he added.

The oil minister reiterated that Iran’s crude oil production capacity has increased to 3.9 million b/d. This is close to the output capacity seen in 2012 before the imposition of international nuclear sanctions specifically targeting Iran’s petroleum and financial sectors.

OPEC set Iran a production ceiling of just under 3.8 million b/d following the group’s decision in November to cut output by about 1.2 million b/d.

$65 per barrel, ambitious?

Despite a recent OPEC agreement to cut oil production and boost prices, it is unrealistic to expect that the commodity will reach $65 a barrel in the near term, an analyst at the Paris-based International Energy Agency said.

“I think $63 – $65 a barrel might be a little bit ambitious there because the OPEC producers have got this basic issue, they don’t want the price to go too low clearly, because their economies wouldn’t stand it,” Neil Atkinson, head of the oil industry and markets division, at the IEA said.

“But if the price goes too high then that’s going to attract a lot of investment in other parts of the world, principally the US shale producers,” Atkinson added.

The six-month agreement had its first test in January. A large number of oil experts do not expect 100 percent compliance.

“The signs are quite encouraging that production has been cut back quite significantly in January,” Atkinson added.

Abundance of sweet crude impact Nigeria’s grade pricing

Abundance of sweet crude in the Atlantic Basin has widened the differentials between Nigeria’s light, condensate-like Agbami and Akpo grades against benchmark Dated Brent, thereby making it difficult for the Nigerian grades to land into Europe and as major buyer India has mostly contented its March-loading demand.

Agbami FOB and Akpo FOB cargoes were recently assessed at a discount of $1.10/b to the West African Dated strip. This is the lowest level for the two grades since December 12, 2015, when they were at Dated Brent minus $1.15/b.

Both grades have dropped precipitously since the beginning of December, when Agbami briefly went into positive territory at a premium of 5 cents/b to the WAF Dated Strip and Akpo was assessed at flat to the WAF Dated Strip.

Large volumes of Mediterranean sweet crudes such as Kazakhstan’s CPC Blend and Algeria’s Saharan Blend, refinery maintenance in Europe, sluggish demand for light naphtha-rich North Sea grades and more of a focus on heavy sours by a number of refineries and subsequent falling differentials for sweet Mediterranean and North Sea grades, have made it difficult for Agbami and Akpo to find buyers in Europe.

Around half of the 8 Agbami March-loading cargoes have sold and three of the four Akpo March-loading cargoes also still available, trading sources said.

Major buying refineries of Nigerian crude in India have also now finished their March tendering cycle and due to limited interest from Europe, some of the typically attractive grades to India, like Agbami, will have to discount further to find homes, traders said.

FRANK UZUEGBUNAM