Oil surges with Iran saying differences remain on sanctions deal

Oil climbed the most in a month after Iran said that gaps remain in negotiations aimed at reaching a deal to end US sanctions on its crude.

Futures rose 3.9 per cent in New York on Monday with added support from a weaker dollar, which makes commodities priced in the currency more attractive, and a rally in US equities. Iran said there are still differences around the timing of when countries will return to compliance with the original 2015 nuclear agreement, allaying some concern about a rapid ramp-up in the Persian Gulf nation’s output.

While the market is anticipating the Islamic Republic’s supply will pick up again by late summer, the demand recovery will be strong enough to absorb it, Goldman Sachs Group said. The bank expects Brent futures to hit $80 a barrel in the next few months.

“Seasonally we’re coming into a strong demand period, overwhelming concerns on supply,” said Peter McNally, global head for industrials, materials and energy at Third Bridge. With the US continuing to reopen, air travel picking up and Europe lifting pandemic-driven lockdowns, “it’s more than likely those barrels can get absorbed.”

Talks between Iran and world powers will continue in Vienna this week to resolve outstanding issues. As part of that process, Iran extended a United Nations nuclear inspections agreement, buying diplomats time to revive the landmark deal that would usher in an official return of the Persian Gulf nation to world oil markets.

“Statements over the weekend in the time between the expiration of the old monitoring agreement and the signing of the new deal made it clear that the sense of optimism (over a deal) that was pressuring prices last week was probably overdone,” Bob Yawger, head of the futures division at Mizuho Securities, said in a note. “There is still a lot of work that needs to be done before a final agreement is finished.”

Global benchmark crude has been largely stuck between $60 and $70 a barrel since March, with concern about returning output and Covid-19 flare-ups counterbalanced by the demand recovery underway in some key markets. Virus cases in the US were below 30,000 every day last week for the first time since June, and drivers are taking to the road again in parts of Europe, helping boost demand in the region.

The discount for US benchmark crude futures against Brent shrank on Monday to its narrowest since the end of November on a settlement basis. The smaller that discount becomes, the less attractive US crude exports are to foreign buyers.

Prices:

• WTI for July delivery rose $2.47 to settle at $66.05 a barrel
• Brent for the same month gained $2.02 to $68.46 a barrel, to the highest since May 18

Ahead of any agreement on a nuclear deal, Iran has already found buyers for its oil exports, notably China. Those ties may become even stronger, with the leaders of both countries speaking on the phone about Iran expanding its oil sales to China.

Still, Goldman isn’t alone in its view on the impact of returning Iranian supply. Citigroup said it expects only a partial return of the country’s barrels initially. The bank still sees oil hitting the mid-$70s in the third quarter, but said prices could retreat thereafter.

Physical markets continue to get a boost from a raft of buying from refiners in Asia. Japan’s Fuji Oil became the latest company to buy Middle Eastern crude on Monday, after a spate of bullish interest last week.