(Bloomberg) — Oil declined on signs of progress in US-Iran peace talks including a waiver on some Iranian oil sanctions, bolstering hopes for a continued recovery in flows from the Persian Gulf.
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Brent crude traded around $78 a barrel while West Texas Intermediate’s most active contract was near $74. The US issued a license allowing the sale of some Iranian oil and petroleum products for 60 days, citing “productive talks” in Switzerland. The positive signals came after a rocky start to the negotiations.
Transits through the Strait of Hormuz have also ticked up, despite Iran claiming on Saturday to have again closed the critical waterway. Shipping data compiled by Bloomberg showed millions of barrels of oil flowing through the chokepoint over the weekend. Iran has also ramped up the amount of oil it sends openly through Hormuz to the highest since the war began, and slashed prices for cargoes offered to China, its sole major customer.
“Hormuz transits are going to be treated a bit like a proxy for progress on physical oil and at diplomatic level to a degree,” said Neil Crosby, head of research at Sparta Commodities. “And the direction of travel — i.e. rising — is most important for now.”
The war in the Middle East choked off supply in a region responsible for a third of the world’s oil production. Crude futures have retreated in recent weeks — although prices remain slightly higher than pre-war levels — after global refiners found temporary workarounds, and as the prospect of an end to the conflict fueled optimism over a rapid return to normality.
The Joint Maritime Information Center, which liaises between navies and merchant shipping, reiterated that the threat level for maritime security via the Strait of Hormuz and the adjacent Gulf of Oman had been lowered to “moderate.”
Iran and the US have agreed on a roadmap toward reaching a final deal in 60 days, and technical talks will continue for the remainder of the week, according to a statement issued by Qatar and Pakistan, which are mediating discussions in Switzerland.
A peace deal would in theory unleash a gush of supply in the face of weak immediate demand, especially given a slump in purchases by top importer China. About 80 million barrels of crude are set to suddenly hit the market should Hormuz fully reopen, threatening to leave refiners swamped.
Persian Gulf producers are preparing for a production ramp-up, with Kuwait canceling earlier force majeure notices. Abu Dhabi National Oil Co. told customers to resume loading supply from inside the Persian Gulf, while selling spot crude in a series of tenders.
Still, the rush of barrels might not be enough to stave off supply concerns in the longer run. Crude and product deficits stand between three-and-a-half to four million barrels a day, according to Ryan McKay, senior commodity strategist at TD Securities.
“As the market ultimately remains tight throughout the summer, the set-up for higher oil prices remains very strong,” McKay said.
–With assistance from Serene Cheong.
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