By Barani Krishnan — The biggest farce in the oil market, one which OPEC ignores with impunity, might be nearing its end: U.S. sanctions on Iranian crude.

The Biden administration is trying to replace the Trump-era sanctions with an agreement that will prevent Tehran from having any weapons-grade nuclear program, a pact that the International Atomic Energy Agency will enforce.

In the meantime, Iran exports hundreds of thousands of barrels of oil daily, in violation of the sanctions, which the State Department clearly isn’t doing enough about.

The bigger charade on this comes from OPEC, or the Saudi-led Organization of the Petroleum Exporting Countries. The cartel’s 13 member countries, and 10 non-member oil-producing allies, who when put together are known as OPEC+, basically dominate the world oil trade.

Total world oil demand is expected to expand by 5.7 million barrels daily in 2021 to 96.7 million, following a 8.7 million-barrel collapse last year, according to the Paris-based International Energy Agency, which oversees the interest of Western oil consumers.

OPEC, in a report released two weeks ago, said it expects demand for its crude at 27.7 million barrels daily in 2021, up 200,000 from an April estimate.

Non-OPEC supply was expected to rise by 700,000 barrels daily, down from the April estimate of 930,000, it said.

The problem is nowhere in these numbers is an estimate of what the situation would be if Iranian exports are legitimately restored to the oil market. Iran was a founding member of OPEC and the world’s fourth largest crude exporter until Trump’s sanctions came on in 2018.

Trump's punitive action has led Tehran’s arch-rival Saudi Arabia, which controls OPEC, to virtually treat Iran as an outcast over the past three years, omitting it from any projections on the cartel's supply-demand.

The irony is this OPEC behavior has continued despite Iran steadily raising its illicit crude exports since the ban was imposed on its oil, moving from a cat-and-mouse game under the Trump administration to a full-fledged brazen violation of sanctions with Biden in office.

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To OPEC+’s credit, the slash of 7-8 million barrels per day of production by the 23-nation grouping since April 2020 was what helped U.S. crude prices rebound from a pandemic crush of minus $40 per barrel to a 2021 high of just under $68.

But while the rest of the producers in the alliance were cutting, Iran was slowly adding. That, of course, didn’t matter for all of last year when demand for oil was still restrained and the focus was almost entirely on the OPEC+ cuts which helped drain a huge global glut.

Now, with both demand and supply growing – amid new concerns about Covid ramp ups in Asia – it’s a different story.

Surveys show Iran pumped even more than usual in April, driving a 30,000 barrel per day rise in OPEC’s output to 25.08 million. It would be right to add any estimate of Iran’s output to OPEC’s as the Islamic Republic remains a part of the cartel, whether the Saudis wish to acknowledge that.

While there is no word yet on how quickly the U.S. sanctions on Iranian oil will come off, comments from Tehran, European and U.S. diplomats suggest that a decision may be imminent, even if there’s more work to be done.

Iranian President Hassan Rouhani told national television on Thursday that “finer points” were being worked out by world powers negotiating to bring Tehran back into the nuclear accord canceled by Trump.

Even so, some European diplomats insisted that success was not guaranteed and that tough issues remained in the talks going on in Vienna since mid-April.

Last week, inspectors from the International Atomic Energy Agency concluded that Iran has been enriching uranium – the fuel for a nuclear weapon – at levels far beyond the limits set by the 2015 deal.

That has only added to the urgency in Vienna for an agreement that would involve Iran ratcheting back its nuclear program in exchange for relief from American sanctions.

Elliott Abrams, who oversaw the drumbeat of sanctions against Iran toward the end of the Trump administration, said the penalties blocked revenues worth tens of billions of dollars to Tehran, limiting how much support Iran could devote to its nuclear and military programs, including its proxy forces across the Middle East.

Biden’s aim of returning Iran to a nuclear accord with the world would further extend expiration dates for international surveillance of the Islamic Republic and prohibit it from nefarious activities in the region.

“That’s a success, and it can be measured by Iran’s efforts to get sanctions dropped or to get around them,” Abrams was quoted as saying by the New York Times. “No sanctions regime is ever 100 percent effective,” he said, “because there are always ways to cheat and companies willing to take the risk.”

If sanctions come off Iran, at stake will be an additional supply of some 500,000 to 2 million barrels of crude that could reenter the market anytime between the next three to 18 months, those in the know say.

Iran has said previously that it could return “within months” to its peak oil production of nearly 4 million barrels a day once the sanctions on its oil are lifted. Sources familiar with the country’s crude output currently estimated its production at around 2 million barrels daily.

Analysts say the additional supply from Iran, whenever that comes, will force a reconfiguration of global oil supply that could be more bearish than bullish – especially with questions about demand resurfacing after new coronavirus flare-ups in No. 3 oil consumer India.

Oil Market Brief&Price Roundup

West Texas Intermediate crude for July delivery, the benchmark for U.S. oil, did a final trade of $63.87 before the weekend, after settling Friday’s trade at $63.58, up $1.53, or 2.5%.

For the week though, WTI lost 2.7%.

Brent crude for July delivery, which acts as the global benchmark for oil, did a final trade of $66.68 prior to the weekend. It settled up $1.33, or 2%, at $66.44.

For the week, Brent fell 3.3%.

Oil prices rose on Friday but still ended the week about 3% down on fears that Iran was nearing a nuclear deal that could remove U.S. sanctions, possibly bringing another two million barrels per day of crude to the market.

Speculation of a storm forming in the Gulf of Mexico, where the bulk of U.S. energy installations are located, helped oil prices to rebound from Thursday’s losses triggered by worries over the Iranian situation.

But the gain wasn’t enough to offset the slide for the week.

“Much of the energy market has priced in more Iranian crude output later this summer,” said Ed Moya, head of research for the Americas at online trading platform OANDA.

WTI and Brent rose on the day as a weather system forming over the western Gulf of Mexico showed a 40% chance of becoming a cyclone in the next 48 hours, according to data from the U.S. National Hurricane Center.

"This early storm prompted traders to buy crude ahead of the weekend in anticipation of potential production shut-ins," said Phil Flynn, senior analyst at Price Futures Group in Chicago.

But the concerns over Iranian crude ramp-up were greater.

Energy Markets Calendar Ahead

Monday, May 24

Private Cushing stockpile estimates

Tuesday, May 25

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, May 26

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories

Thursday, May 27

EIA weekly report on {{ecl-386||natural gas storage}

Friday, May 28

Baker Hughes weekly survey on U.S. oil rigs

Gold Market and Price Roundup

Gold prices dipped on Friday even as they clinched a third straight weekly gain. But longs hoping to break above $1,900 were stopped $10 short of the target, proving sentiment for the yellow metal wasn’t as hot yet as they thought.

Gold for June delivery on New York’s Comex did a final trade of $1,881.85 an ounce before the weekend. On Friday, it settled at $1,876.70 an ounce, down $5.10, or 0.3%, on the day.

For the week, the benchmark gold futures contract rose 1.8%, extending last week’s 0.7% gain and the 3.3% advance the week prior.

More importantly though, Friday’s peak was $1,890.15 – the second time this week that June gold had missed the $1,900 target by just about $10. The first occasion was on Wednesday when it got to as high as $1,891.25.

The spot price of gold, reflective of real-time trades in bullion, last traded at $1,881.21 on Friday, after an intraday high of $1,889.40.

Traders and fund managers sometimes decide on the direction for gold by looking at the spot price – which reflects bullion for prompt delivery – instead of futures.

A break above $1,900, particularly $1,920, will bring gold above the lows of the year, returning it to positive territory for 2021. It could also set the path for a recapture of the high $1,900s pivotal for those hoping to see a return to August record highs of above $2,000.

This week was significant for gold with more than a handful of analysts predicting a crack of the $1,900 ceiling as the Federal Reserve appears determined to stay with its ultra-low interest rates and accommodative monetary policy.

This is despite a raging debate on Wall Street that the central bank might be forced to tighten monetary policy quicker than it expects as inflation builds from soaring commodity prices.

“Gold bulls are pausing for breath after a six-session winning run,” said Sophie Griffiths, who heads U.K. and EMEA market research for online trading platform OANDA.

“The bottom line is that any rise in US interest rates is still a long way off. The low-interest-rate environment is set to stay for some time yet, which is supportive of non-yielding gold.”

Data since last month on consumer and producer prices, industrial production and consumer confidence have all ticked higher. Prices of everything from houses to the lumber that goes into building them have also soared through the proverbial roof, scaring economists into believing that inflation this year could be at its highest in 35 years.

The Federal Reserve acknowledges the price pressures arising from bottlenecks in U.S. supply chains struggling to cope with demand in an economy reopening after months of pandemic-suppression.

But the central bank insists that these inflationary pressures are “transitory” and will fade as the economy makes a full recovery from the pandemic. It also says it does not see the need for now to raise interest rates.

Such an environment heightens gold’s natural role as an inflation hedge, say longs who are emboldened to attempt first a return to $1,900 levels last seen in January, before a further push to record highs of around $2,100 set in August.

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.

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