US DECISION ON IRAN WILL PUT STRAIN ON OIL PACT
▶ Benchmarks shoot up after Trump’s move, with Brent reaching $77
The US’s exit from a comprehensive deal to rein in Iran’s nuclear enrichment programme is likely to throw a spanner in the works of a global pact to lower oil inventories, analysts said.
The widely anticipated move drove up prices of Brent and West Texas Intermediate – benchmarks for crude – with the former reaching $77 per barrel on Wednesday, and the latter continuing its rally beyond $70 per barrel. This would give another reason for the Opec, non-Opec agreement to be revised, and it could be totally scrapped or phased out, said Iman Nasseri, managing director, Middle East at Facts Global Energy.
On Tuesday, US President Donald Trump made good on his campaign promise to rescind US approval of the Joint Comprehensive Plan of Action (JCPoA) signed under Barack Obama that sought to restrict Iran’s nuclear enrichment programme and relieve its economy of EU embargoes.
The green light given to Iran under the JCPoA to raise its production capacity through foreign investment and exporting to international oil markets coincided with Opec, and sovereign producers outside the group led by Russia, agreeing to slash output by 1.8 million barrels per day from the start of 2017. Under the pact Iran, was exempt and allowed to raise its production, which had fallen to 2.8 million bpd under the sanctions era, to the pre-sanctions level of 3.9 million bpd.
After reaching its desired target, Tehran slashed production, with output currently averaging 3.81 million bpd in compliance with the global pact, which has since May 2017 been extended into this year. The global effort had been one of the causes – apart from loss of production of Opec member Venezuela and geopolitical tensions in the Middle East – of rallies in the prices of crude this year.
But observers reason that when Opec and non-Opec convene mid-year to gauge metrics to drive global inventory levels down and consider the duration of the pact, they might be looking for an early exit clause, given half a million Iranian barrels will soon be off the market.
“If the oil market does tighten much more and much faster than expected because sanctions disrupt substantial Iran crude supplies, Opec/non-Opec may find itself at a crossroads of contemplating an exit far sooner than it had expected,” said Vandana Hari, founder and chief executive of Singapore-based Vanda Insights.
Ms Hari does not expect the deal to collapse, and particularly not because of Iran’s desire to relieve itself of any obligation to comply. “Iran cannot afford to alienate itself,” she said.
Opec has yet to officially comment on the ramifications for the pact of the US exit from JCPoA and how it’s likely to accommodate Iran’s compliance once sanctions come into effect in August.
Opec’s supply-cut strategy, which achieved a record compliance of 149 per cent in March, is “far more significant” for the group than Iranian sanctions, said Spencer Welch, oil markets and downstream director at London-based IHS Markit.
“The supply-cut deal took a lot of negotiating to put in place,” he said.
“Likely, they would be very cautious before changing policy – particularly if there is a chance that Iranian sanctions could suddenly change again.”
Iran, a founding member of Opec, is the Middle East’s third-largest producer of oil, and has the largest proven reserves of gas globally.
Much of its oil wealth remains untapped due to its ageing infrastructure and lack of finance, owing to its seclusion under the sanctions.
Aside from crippling the country’s economy, sanctions limited the ability of Iran’s under-invested 100-year old refining sector from producing higher-grade fuel, forcing it to burn low-quality diesel that contributes to high air pollution levels.