Crude Falls as Iran Deal Raises Prospect of More Global Output

Jan 13, 2014 4:17 pm ET

(For Bloomberg fair value curves, see CFVL <GO>.)

Jan. 13 (Bloomberg) -- West Texas Intermediate crude fell after Iran agreed to curtail its nuclear program starting Jan. 20, easing some sanctions on OPEC’s fifth-biggest oil producer.

WTI declined 1 percent. Iran will allow more intrusive inspections under the accord with China, France, Germany, Russia, the U.K. and the U.S. in November, U.S. President Barack Obama said yesterday. Iran’s oil exports plunged last year as U.S. and European Union sanctions meant that banks and insurers couldn’t handle Iranian sales of the fuel. Global production is expected to increase to 91.52 million barrels a day this year, according to the U.S. Energy Information Administration.

“Negotiations for a longer-term deal that would return Iranian barrels to market will now proceed,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “The Iranian oil would come to an already well- supplied market, raising problems for producers.”

WTI for February delivery fell 92 cents to settle at $91.80 a barrel on the New York Mercantile Exchange. The volume of all futures traded was 5.2 percent below the 100-day average at 2:49 p.m. Futures are down 6.7 percent so far this year.

Brent for February settlement decreased 50 cents, or 0.5 percent, to end the session at $106.75 a barrel on the London- based ICE Futures Europe exchange. The volume of all futures traded was 12 percent higher than the 100-day average. The European benchmark crude closed at a $14.95 premium to WTI.

Atomic Pact

The Iranian pact starts a six- to 12-month timetable to reach a final agreement. Iran has asserted its atomic work is for peaceful purposes, while the U.S. and its allies say the Islamic republic seeks to develop a nuclear-weapons capability.

“This brings the prospect of oversupply closer,” said John Kilduff, partner at Again Capital LLC a New York-based hedge fund that focuses on energy. “A return of Iranian barrels would force the rest of OPEC to reduce output.”

Iran pumped 2.68 million barrels a day last month, data compiled by Bloomberg showed, ranking its output behind Saudi Arabia, Iraq, Kuwait and the United Arab Emirates in the Organization of Petroleum Exporting Countries. The nation was OPEC’s second-biggest producer in June 2012, before sanctions hindering its ability to export oil came into effect.

There are bipartisan efforts in Congress to escalate pressure on Iran with further sanctions. Iran has threatened to abandon talks if Congress votes to tighten economic restrictions and Obama repeated yesterday his vow to veto new penalties while negotiations continue.

Israeli Prime Minister Benjamin Netanyahu said today at the funeral for former Prime Minister Ariel Sharon that his country wouldn’t let Iran acquire nuclear weapons capability.

Agreement Foes

“There’s a lot that can go wrong during the next six months to derail a final deal,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “There’s certainly a lot of opposition to any agreement in Congress and Israel. This is clearly not going to be adding barrels to the market in the near term.”

Libya, which holds Africa’s biggest crude reserves, pumped 592,065 barrels on Jan. 11, National Oil Corp. said on its website. The country’s output, curbed by political protests and the seizure of ports by rebels, has recovered following the restart of the Sharara field this month.

South Sudan’s government and rebel representatives prepared to begin direct negotiations on a cease-fire agreement. South Sudan has been exporting all of its crude, about 245,000 barrels a day. The fighting has cut output to about 200,000 barrels daily, the country’s government said.

Oil also fell with U.S. equities as investors assessed the outlook for the Federal Reserve to speed the pace of stimulus cuts. The Standard & Poor’s 500 Index dropped 1.1 percent and the Dow Jones Industrial Average slipped 0.9 percent.

U.S. Production

WTI dropped to an eight-month low of $91.24 on Jan. 9 on surging output, ample supply and reduced fuel use in the U.S. American crude production rose 24,000 barrels a day to 8.15 million in the week ended Jan. 3, the most since September 1988, Energy Information Administration data showed.

“We could soon be testing $90,” Yawger said. “Traders will first take aim at $91.24 before testing $90. We haven’t dropped below $90 since April, but it’s not that far away.”

Hedge funds became less bullish on WTI for the first time in six weeks, according to Commodity Futures Trading Commission data. Money managers cut net-long positions, or wagers on a price advance, by 8.6 percent in the week ended Jan. 7, the CFTC said. That’s the most since June. So-called short positions gained the most since April.

Brent Wagers

Speculators cut net bullish wagers on Brent by the most in more than six months, ICE Futures Europe figures show. Futures and options betting on gains outnumbered shorts by 100,096 in the week ended Jan. 7, the Commitments of Traders report showed.

Implied volatility for at-the-money WTI options expiring in March was 19.8 percent, up from 18.3 percent Jan. 10, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 440,353 contracts at 2:51 p.m. It totaled 643,418 contracts Jan. 10, 22 percent higher than the three-month average. Open interest was 1.62 million contracts.

--Editors: Margot Habiby, Dan Stets