Oil has worst week in over a month with potential Iran return

Oil benchmarks suffered their worst week in more than a month as the market considered the consequences of a potential nuclear deal that could lift US sanctions against Iranian crude.

WTI futures in New York fell 2.7 per cent for the week, the worst performance since early April. Brent posted the largest weekly decline since March, amid the possible return of millions of barrels a day of Iranian crude returning to the market. President Hassan Rouhani this week said world powers have accepted that major sanctions will be lifted as part of any nuclear deal.

“There’s concern about the additional slug of supply potentially coming from Iran,” said John Kilduff, a partner at Again Capital. “The prospect of more Iranian supply has been a momentum killer.”

Some analysts estimate Iran could return to pre-sanctions production of almost 4 million barrels a day in as little as three months. Iranian oil output has been rising this year and was about 2.4 million barrels a day last month, according to estimates compiled by Bloomberg.

The key to whether the potential rise in Iranian output upsets global inventory drawdowns is how early the country re-enters the oil market, Michael Hsueh, an analyst at Deutsche Bank, said in a note. While the third-quarter deficit stands at only 1.2 million barrels-a-day, the market is more equipped to handle the additional output the following quarter when that shortfall is likely larger, he wrote.

“The most pressing question will be how much an early Iranian ramp-up could hurt third-quarter balances,” Hsueh wrote. “The schedule of the ramp-up will be principally a question of politics and negotiation,” as Iran’s supply “could be brought into the market before an actual increase in production.”

Oil was also caught in a broader selloff this week in commodities and equities markets following concerns about inflation. Hedge funds cut their net bullish position in WTI and Brent for a second straight week, according to weekly ICE Futures Europe and CFTC futures and options data for four contracts.

The streak of losses this week tested the borders of oil’s current trading range, with the benchmarks finding technical support after dipping to their lowest since April. Brent has been trading within a roughly $5 band over the last month, pulling back from $70 a barrel but prompting a round of buying the closer it got to $65.

Prices

• West Texas Intermediate for July delivery increased $1.64 to $63.58 a barrel, but ended the week 2.7 per cent lower in its largest such decline since early April
• Brent for July settlement rose $1.33 to $66.44 a barrel. The contract posted a 3.3 per cent weekly decline, the largest since March

Prior to the implementation of sanctions, Iran was producing about 3.8 million barrels a day of crude. Only Iraq and Saudi Arabia’s output exceeds that amount within the Organization of Petroleum Exporting Countries. Still, Citigroup estimates overall global demand is strong enough to absorb any additional supply, including from Iran and that prices will continue to climb.

Meanwhile, the prompt spread for Nymex gasoline futures moved into a marked contango on Friday, reflecting expectations that fuel markets may be oversupplied.

“The gasoline spread threatening to switch to contango implies the gasoline market is oversupplied going into Memorial Day weekend, and that’s a negative price development,” said Bob Yawger, head of the futures division at Mizuho Securities. “The inflation situation has also started to spook some people, with prices at the pump getting a little lofty.”