Oil Set for Biggest Weekly Drop Since March on Iran Supply Boost

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Oil Set for Biggest Weekly Drop Since March on Iran Supply Boost

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Sharon Cho and Alex Longley
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(Bloomberg) -- Brent crude headed for its biggest weekly drop since March as a potential end to years-long sanctions raised the prospects of Iran ramping up supplies.

Futures in London rose near $65 a barrel on Friday but are down about 5% this week. While the global benchmark topped $70 earlier on Tuesday, the market has dramatically repriced as a deal to lift restrictions on Iran’s oil exports appeared to be ever closer.

The Persian Gulf nation’s president, Hassan Rouhani, said world powers have accepted that major sanctions will be lifted, though details and finer points still needed to be ironed out. Some of the most optimistic analysts estimate the country could return to pre-sanctions production of 4 million barrels a day in as little as three months.

Iranian output has been rising this year and was about 2.4 million a day last month, according to estimates compiled by Bloomberg. With traders gearing up for even more supply, Brent’s nearest timespread is nearing a bearish contango structure in an indication market tightness is easing.

Oil has also been swept up in a broader sell-off in commodity and equity markets recently following concerns about inflation, speculation that the U.S. Federal Reserve will ease stimulus and China’s warning on measures to cool price spikes. The surge in the coronavirus continues to haunt some major consumers, with India’s largest refiner canceling a tender to buy Middle Eastern crude.

“The market is a bit surprised at how quickly they could come to a deal,” said Warren Patterson, head of commodities strategy at ING Groep NV. There’s “potential that additional barrels come to the market much quicker than many in the market were initially expecting.”

Negotiators in Vienna, where Iran and the U.S. have engaged in indirect talks to restore a nuclear deal, which former President Donald Trump abandoned in 2018, have taken a “major step,” Rouhani said Thursday, according to Iranian state TV.

Prior to the implementation of sanctions, Iran was producing about 3.8 million barrels a day of crude. Only Iraq and Saudi Arabia are currently producing more than that amount within the Organization of Petroleum Exporting Countries.

Still, Citigroup Inc. estimates overall global demand is strong enough to absorb any additional supply, including from Iran and that prices will continue to climb.

Additional purchases could also come from China, where planned tax adjustments are sparking a chain reaction that’s set to boost crude imports and raise refinery run rates. The levy will be slapped on inbound flows of three products from mid-June that are often used to make low-quality fuels.

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