Oil Risk Flares in Iran Nuclear Talks Amid Iraqi Unrest: Energy

Jul 02, 2014 6:19 pm ET

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July 2 (Bloomberg) -- Targeting Iranian crude exports to force cuts in the nation’s nuclear program is becoming a riskier strategy for oil markets as violence erupts in neighboring Iraq and supply disruptions persist in Libya.

Negotiators from the U.S., Russia, China, Germany, France and the U.K. return to talks with Iranian officials in Vienna today to discuss a deal that would lift sanctions on energy, banking, shipping and other areas of trade in return for Iran ensuring its nuclear program is peaceful. Last year, Iran agreed to scale back the program and got limited relief from bans on petrochemicals, gold and auto trade.

The talks are colliding with increased fighting across northern Iraq, the world’s fourth-largest crude exporter, and political feuding in Libya, holder of Africa’s biggest oil reserves, where output has dropped. The six nations will be weighing whether to keep curbs on Iran, which has been allowed to maintain exports at about 1.1 million barrels a day under the temporary pact expiring July 20. The Persian Gulf nation was shipping 2.5 million barrels before sanctions.

“Iranian oil has been helping at this difficult time in markets,” Robin Mills, a Dubai-based analyst at Manaar Energy Consulting & Project Management who previously worked as an engineer on Iran for Royal Dutch Shell Plc, said by phone on June 30. “If you start taking more Iranian oil off the market, it will tighten and you put yourself in the bad situation of having less flexibility.”

Biggest Threat

Brent crude traded at about $112 a barrel yesterday and slipped 0.9 percent to end at $111.24 today on the ICE Futures Europe exchange. It rose to $115.71 on June 19, a nine-month high. Options prices are close to the most bullish they’ve been in 10 months and volatility in Brent has climbed from a record low because of the fighting in Iraq.

Forces from the militant group that now calls itself the Islamic State seized towns in northern Iraq and attacked the nation’s biggest oil refinery last month. The fighting poses the single biggest threat to new output this decade within the Organization of Petroleum Exporting Countries, which supplies 40 percent of the world’s oil, according to the International Energy Agency, a Paris-based adviser to 29 nations.

Iran will probably export crude at current levels in the second half of the year, according to a Bloomberg survey of six oil analysts. The talks in Vienna will probably be extended for another six months with no additional oil sanctions imposed on Iran, they said.

Crude Exports

Two U.S. officials who weren’t authorized to be quoted said Iranian crude exports are within the range allowed by the interim deal. Iran’s shipments of crude and condensate last year were about 1.04 million barrels a day, according to customs and IEA data compiled by Bloomberg.

Iraq and Iran are both members of OPEC, which will need to pump the most in two years over the next six months to meet record global demand of 94 million barrels a day in the fourth quarter, the IEA said June 13. It raised its estimate for how much consumers will demand of the group’s oil by 300,000 barrels a day to 30.9 million on average in the second half, almost 1 million more than OPEC’s own target.

“The balance in world oil supplies is much tighter than was expected at the beginning of this year,” Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt, said by phone June 30. “Definitely sanctions are not off the table. But the escalation of the situation in Iraq comes at no good time for such sanctions. We don’t have such spare capacity at the moment to cope with the possible shortfall from Iraq as well.”

Enrichment Capacity

The U.S. and its allies, concerned Iran may develop a nuclear weapon, want it to reduce uranium-enrichment capacity. Iran says its program is for civilian power supply and medical research only.

U.S. Secretary of State John Kerry wrote in a Washington Post editorial yesterday that “substantial gaps still exist between what Iran’s negotiators say they are willing to do and what they must do to achieve a comprehensive agreement.”

The six nations negotiating with Iran are determined to reach a “comprehensive agreement” by July 20, European Union spokesman Michael Mann said in an e-mail June 26. Iran officials hope the talks will result in such an accord, Deputy Foreign Minister Abbas Araghchi told the Tehran-based SNN news agency on June 29.

Risks of supply disruptions elsewhere in the world may not translate into output reductions in practice, Cliff Kupchan, a Washington-based consultant at Eurasia Group who specializes in Iran, said by phone June 26.

Robust Supply

“Supply will remain relatively robust despite the current range of geopolitical crises,” Kupchan said. Libya’s output is likely to recover and there are no immediate risks to shipments from Iraq’s south, home to most of the nation’s production, he said.

Rebels who’ve blocked eastern ports in Libya since last year said today that they are reopening Es Sider and Ras Lanuf in the country’s east.

Political and security issues have also kept Nigerian crude off the market and raised concern that future production may be at risk, the IEA said in its mid-year report published June 17. Conflict in Syria, South Sudan and Yemen will also hurt output this year, the IEA said.

The negotiations in Vienna will focus specifically on Iran’s compliance with commitments to scale back its nuclear program and probably won’t take account of the oil market, said Gary Sick, a senior research scholar at Columbia University’s Middle East Institute.

Background Noise

“You can’t talk about anything in the Persian Gulf without oil coming up,” Sick said by phone June 26. “But I’ve seen no evidence that the negotiators have seen oil as anything other than background.”

Iraq’s oil production has mostly been unaffected by the fighting in the north. The nation will export close to a record 2.8 million barrels a day this month, according to loading programs obtained by Bloomberg.

Still, the threat of widening violence in Iraq spurred speculation that the country’s long-term supply gains won’t be as high as the government’s forecast -- that production will exceed 8 million barrels a day from 2018. By contrast, Iran can pump more oil than it is now. The nation’s output averaged 2.6 million barrels a day last year, the lowest since 1989, according to data compiled by Bloomberg.

“Every additional barrel of oil Iran can sell is good news for them,” said Abhishek Deshpande, a crude markets analyst at Natixis SA in London. This month “we’ll have a better sense of where talks are going and we’re most likely to have an extension to December.”

--With assistance from Grant Smith in London and Indira A.R. Lakshmanan in Washington.