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Shift In U.S. Policy On Iran Oil Could Swing Global Markets
Back in August, we reported that Iran oil exports had hit record highs thanks in large part to the Biden administration opting to look the other way as Tehran boosts production ostensibly in a bid to keep markets well supplied and oil prices low. The price response to the escalation in the Middle East tensions has so far been modest; however, the Israel-Gaza war is likely to cause a significant shift in U.S. policy on Iran due to its open support and backing for Hamas.
Commodity analysts at Standard Chartered have noted that the decision towards the end of the first Obama administration to link trade policy to imports of Iranian oil by key consuming countries effectively cut Iran’s output by over 1 million barrels per day (mb/d).
Constraints were later eased after the signing of the Joint Comprehensive Plan of Action (JCPOA) in 2015. However, constraints were tightened again after the U.S. withdrew from the JCPOA during the Trump administration, with output falling below 2mb/d in 2020 when waivers given to consuming countries were withdrawn. Iran’s oil output and exports have increased sharply under the Biden administration, with production hitting 3mb/d, including 500,000 b/d in the current year, while exports sit just under 2mb/d.Earlier, reports emerged that the U.S. and Iran were making progress after resuming talks on a nuclear deal, a move that could ease sanctions on Iran’s oil exports. Israel’s Haaretz newspaper reported that the talks are moving forward more rapidly than expected, with the possibility of a deal being struck in a matter of weeks.
Deal terms are likely to include Iran ceasing its 60% and higher uranium enrichment activities in return for permission to export as much as 1M bbl/day of oil. A successful nuclear deal could change the oil markets, with former Iran oil minister Bijan Namdar Zanganeh saying that his biggest dream has always been to increase Iran’s oil output to as much as six million barrels per day.
But recent allegations that Iran helped Hamas plan the Israel attack is very likely to seriously strain relations between Washington and Tehran. StanChart has opined that The U.S. has three broad policy options in relation to Iran’s oil output: (1) the status quo, with output at 3mb/d or higher, (2) the pre-2023 plateau of close to 2.5mb/d, or (3) near-zero exports with output below 2mb/d as reached at the end of the Trump administration.
The analysts note that option #1 was the most expedient policy for the U.S. in terms of both market influence and geopolitics just a week ago. However, the latest developments in the Middle East have brought options #2 and #3 into focus as potential policy targets.
Europe Gas Prices Soar After Israel Shuts Gas Field
Whereas oil markets do not appear to have been affected much by Israel’s crisis, the precautionary closure of Israel’s Tamar gas field by Chevron Inc. (NYSE:CVX) has sent Europe’s gas prices rocketing despite the continent being flush with the commodity. StanChart estimates that the shutdown has cut Israel’s domestic output by about 28 million cubic meters per day (mcm/d) and sent Europe’s natural gas prices 15% higher.
StanChart notes that whereas exports from Israel to Egypt usually come from the Leviathan field, the Tamar outage is likely to have knock-on effects, with early indications suggesting that exports have been reduced by about 5 mcm/d from the usual 23 mcm/d. Theoretically, the reduction of exports to Egypt could have implications for European markets as it reduces the
likelihood of Egypt loading LNG cargoes. StanChart has observed that those fears are somewhat overblown since the number of cargoes at risk is small, if not zero. Indeed, Egypt’s domestic demand has been so strong that no cargoes were exported in September.
In their defense, Europe’s gas markets are facing other supply risks beyond Tamar including renewed concerns over strike action in some Australian LNG facilities, as well as an outage in a two-way interconnector pipeline between Estonia and Finland. The damage to the Balticconnector pipeline and an adjacent telecommunications cable is being treated as potential sabotage by the Finnish investigation. While the pipeline itself is of relatively minor significance within the EU supply system, market concerns are likely to be heightened about the potential sabotage of other vital pipelines.
Europe’s gas inventories have continued to rise even as concerns about potential supply losses have dominated. According to Gas Infrastructure Europe (GIE) data, inventories hit a new all-time high at 112.92 billion cubic meters (bcm) on 8 October, good for 97% of storage capacity. The y/y increase stands at 9.41 bcm and the build above the five-year average is 11.75 bcm. According to StanChart, it seems likely that the start of significant inventory draws will be delayed, and the EU is likely to finish the withdrawal season with very high inventories and potentially well above 70 bcm with early forecasts suggesting that the European winter will be extremely warm. In contrast, inventories finished the 2021-22 withdrawal season four weeks after the invasion of Ukraine at just 29 bcm and the 2017-18 withdrawal season ended with less than 20 bcm in inventory.
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