Iran deal will not disrupt bullish oil market outlook, MUFG says

The addition of Iranian crude this year after a potential nuclear deal is unlikely to have a significant impact on global oil markets and the ongoing rally in prices, according to MUFG Bank.

Iranian nuclear talks are reaching a decisive point as the incentives for the US to strike a deal with Tehran have increased, with oil prices now at a seven-year high, Japan's largest bank said in a research note.

It, however, remains cautious that a “clean deal can be achieved soon” and its base case scenario assumes an interim deal by the summer, which will permit the addition of about 500,000 barrels per day of oil to the market.

“Critically, an earlier agreement than the summer would only have a bearish impact on our 2022 average oil forecasts [currently at $96 per barrel] of [about] $5-$8 per barrel, in our view,” said Ehsan Khoman, director of emerging markets research for EMEA at MUFG Bank.

“Thus, on net, while Iran is the main swing barrel in 2022, a deal would not derail our structurally bullish conviction.”

Talks over a resurrection of the 2015 Iran nuclear deal resumed in Vienna earlier this week, but there’s no clear indication if and when an agreement will be reached, according to officials.

The eighth round of EU-convened negotiations between China, France, Germany, Iran, Russia, the UK, and indirectly, the US, paused last month as envoys returned to their capitals for consultations.

Both Iran and the US say there have been signs of progress, but each side has put the onus on the other to deliver. Last week, the US also announced it was waiving sanctions on Iran’s civil nuclear programme.

The waiver allows other countries and companies to participate in Iran's civilian nuclear programme without triggering US sanctions on them, in the name of promoting safety and non-proliferation.

Meanwhile, the outlook for oil remains bullish amid growing concerns about potential supply disruptions as a result of rising geopolitical tensions in eastern Europe, falling oil inventories and robust demand.

Benchmark crude prices surged by around $15 per barrel in January, breaching the $90 per barrel threshold for the first time since 2014.

“Backwardation on the 12-month strip beginning with the April 2022 contract has hit double digits for both WTI and Brent, reflecting low crude stock levels,” the International Energy Agency said in a report this month.

While global oil supply rose by 560,000 barrels per day to reach 98.7 million bpd in January, the uptrend was “slowed by a chronic Opec+ under-performance versus targets that has taken 300 million bpd of oil off the market since the start of 2021", the IEA said.

A further 1.3 million bpd of Iranian crude supply could gradually be brought to market should sanctions be lifted, it added.

Brent, the global benchmark for two thirds of the world's oil, ended trading on Friday at $94.44 per barrel, while West Texas Intermediate, the gauge that tracks US crude, closed at $93.10 per barrel.

“Global oil markets remain extremely tight — corroborated by futures in super backwardation [signalling market tightness] — playing into our bullish thesis that the simultaneous deficit of depleting inventories, thinning spare capacity and structural underinvestments are blending towards extremely distressed levels,” Mr Khoman said.

US crude inventories fell by 4.8 million barrels for the week ending February 4 from the previous week, the Energy Information Administration said in its latest report. ”

At 410.4 million barrels, US crude oil inventories are about 11 per cent below the five-year average for this time of year,” it said.

Oil demand could increase further this year as global economies continue to recover, crude oil exporters’ group Opec said in its monthly market report.

The group maintained its oil demand forecast for this year at 4.2 million barrels per day, unchanged from the previous month's forecast.

World consumption is expected to exceed the 100 million bpd mark in the third quarter.

“Upside potential to the forecast prevails, based on an ongoing observed strong economic recovery with the GDP [gross domestic product] already reaching pre-pandemic levels, supported by fiscal stimulus, and global trade levels reaching an all-time high in volume terms,” Opec said.

Earlier this month, Opec+ decided to add 400,000 barrels of oil per day to the market in March to meet growing demand in the market.