The price of Brent crude ended last week at $74.19 after closing the previous week at $73.30 and rebounding from $68.62 on Monday. The price of WTI crude followed a similar pattern ending the week at $72.17 after falling to $66.42 on Monday.
With consideration of the agreed supply increases associated with OPEC+, coupled with our forecasted increases in non-OPEC supply and forecasted demand growth, we are projecting that demand will continue to outstrip supply throughout the rest of the year. However, the level of global oil inventories will still be higher than that of pre-COVID at the end of 2021.
We highlighted back in our note of July 12, our expectation that oil prices will continue to trade within a relatively narrow range for the next couple of months. The main risk to this expectation from the supply side is a deal that allows Iran to increase its oil exports substantially in the next few months.
With the negotiations between Iran and the US dragging on there is recent news is that the US is considering tighter sanctions on Iranian oil exports to China, which would further hamper Iran’s economy and affect around one million b/d. Such sanctions would also heighten the tensions between the US and China. The incoming leader of the Islamic Republic, Ebrahim Raïssi, has stressed that widening the agreement to include Iran's regional policy and its ballistic program are not negotiable because they fall under the sovereignty of Iran. From the perspective of the US, it will be very difficult for the Biden Administration to sell a deal to the US voters and their representatives – which will be viewed as enabling Iran to increase oil & gas exports, which are helpful to China – while the administration is perceived to be hindering US production of oil & gas. The selling process will be made even more difficult if the deal does not address other issues including Iran’s ballistic program and interference in the rest of the region. It will be viewed as caving to Iran just to get a deal – and one that does not provide any real benefits to the US and its allies in the region.
Because of the relevance to the energy sector and the oil market, we have assessed the range of issues surrounding the negotiations, which includes the following:
- Given the perspective of the US – what is the possibility of Iran being more flexible?
- What role do the Europeans play in the negotiations?
- Does the election of the new president and the control of all branches of the government by the conservatives affect the negotiations?
- How does the exchange of drone attacks and bombing attacks between the US and Iran-backed militias affect the negotiation?
- How damaging have the sanctions been on Iran – how and who is suffering?
- How supportive are the masses of the hardline? Does the supreme leader and the conservatives have credibility?
- How important is a deal for Iran – especially with Iran expanding its ties to China?
- What is the dynamic between Iran and India? And how does India’s relationship with the US affect the relationship between Iran and India?
- How do the Arab allies of the US view the negotiations?
From the demand side, we believe that upside surprise is unlikely – especially considering the lingering impact of COVID-19. Last week, we highlighted Israel because of its high rate of vaccination and availability of data. The number of cases continue to increase and have increased by 167% over the last 14 days. With respect to hospitalization, the weekly admissions are 206, which compares to 855 at the same period of last year. Weekly new ICU admissions stands at 100, which compares to 324 at the same period of last year. The average number of daily deaths is 1.71, which compares to 9.86 at the same period of last year. It appears that the COVID cases are following the season patterns of last year, but with the vaccine the rate of hospitalization, the number of serious cases requiring ICU admission, and the number of deaths are all running well below the pre-vaccine era. If the pattern with Israel holds for other countries, while there is a real potential of further waves of elevated COVID cases, as long as hospitalizations, serious cases and deaths stay relatively low, the impact on the global economy and oil demand will be mitigated.