Oil drops on possible Iran nuclear deal


oil prices fallingOil prices slipped on Monday as officials from Iran and six world powers discussed a possible deal over Tehran’s nuclear programme that could bring an end to sanctions and allow an increase in Iranian oil exports.

The two sides have until the end of Tuesday to come up with an agreement at talks in Lausanne, Switzerland.

Officials close to the talks have said progress has been made and many investors believe a deal is in the making. Few expect the talks to end without some sort of agreement.

“Regarding Iran, there are two possible outcomes: a framework deal or an extended deadline,” Bjarne Schieldrop, chief commodities analyst at SEB Markets in Oslo, told the Reuters Global Oil Forum.

Brent crude was down 5 cents at $56.36 a barrel by 1345 GMT. U.S. crude was down 10 cents at $48.77.

Oil markets are well supplied and recent figures show global production outstripping demand by around 1.5 million barrels per day (bpd), filling oil inventories.

“Further downward pressure may come at any time from a nuclear agreement with Iran,” said Michael Wittner, analyst at Societe Generale. “If a framework agreement is reached, we would expect an immediate bearish knee-jerk reaction in the markets, with oil prices quickly losing on the order of $5.”

Barclays said a build in U.S. stocks would make its way into an oversupplied global market in the second quarter and that demand would unlikely be strong enough to support oil prices once that happened.

“Continued dollar strength is (also) a headwind to the oil price recovery,” Barclays said, forecasting the dollar would rise above parity with the euro by the fourth quarter of 2015.

Few investors expect the Organization of the Petroleum Exporting Countries, which pumps around a third of the world’s oil, to restrain production to help push up prices.

Oil producers are much more focused on maintaining market share, analysts say.

Lower oil prices have encouraged some oil and gas companies to stop drilling, particularly in the United States, but this is unlikely to affect oil production until later this year.

“The current rig count is pointing to U.S. production declining slightly sequentially in 2Q15 and 3Q15,” Goldman Sachs said, adding that activity could bounce back in 2016 as drillers benefit from falling production costs.

35 million barrel surprise
Iran has been stockpiling oil onshore and in supertankers in the Persian Gulf, according to data compiled by Bloomberg. While estimates of the hoard by ship brokers and government officials vary from as little as 7 million barrels to as much as 35 million, Barclays Plc and Societe Generale SA predict this crude would be the first to be sold abroad if there’s an agreement on Iran’s nuclear program.

If a deal is reached, the Gulf nation could add its stockpiles into an oversupplied oil market where prices have fallen more than 50 percent since June.

“The first wave to look out for when these sanctions are removed is that stored oil coming back into the market,” Miswin Mahesh, an analyst at Barclays in London, said by email. “Their ability to sell from storage will depend on whether shipping and insurance restrictions are also lifted.”

Iran has stored excess crude on tankers for the past 2½ years as tougher restrictions on its oil sales deterred buyers, according to the International Energy Agency. The country exports about 1 million to 1.1 million barrels of crude per day, down from 2.5 million before the U.S. and European Union added oil sanctions in mid-2012, agency data show.

Reuters/ Bloomberg