Iran interim nuclear deal may roil petrochemical, crude prices

Focus article by Muhamad Fadhil

DUBAI (ICIS)–Petrochemicals and crude prices may face downward pressure after an interim nuclear agreement was reached between six world powers and Iran amid concerns a final deal may trigger a flood of supply to an already saturated global market, industry sources said on Friday.

“An Iran nuclear deal will lead to mayhem. Petchem prices will be pushed down due to oversupply,” a Dubai-based trader said.

Iran, a major producer of ethylene, polyethylene (PE) and methanol, would enter a global market facing the immediate prospects of capacity oversupply due to new petrochemical expansions in the Middle East and China.

On Thursday, Iran agreed to a framework deal with world powers on curbing its nuclear program in return for sanctions relief after talks in Switzerland.

The two sides, so-called P5+1 – the US, UK, France, China and Russia plus Germany – and Iran have set a deadline of 30 June for a final deal.

“In return for Iran’s actions, the international community has agreed to provide Iran with relief from certain sanctions. Our own sanctions and international sanctions imposed by the United Nations Security Council,” US President Barack Obama said in an address to the nation, hailing the agreement as a historic understanding.

“This relief will be phased, as Iran takes steps to adhere to the deal. If Iran violates the deal, sanctions can be snapped back into place,” Obama warned.

Details of how the sanctions will be lifted and at what pace have still to be worked out.

Iran asserts it is not seeking nuclear weapons and is pursuing its enrichment programme for peaceful purposes.

As a result of financial sanctions imposed by the US and EU since 2012, Iranian petrochemical producers said they still struggle to sell material outside of key export markets such as China, India and Turkey.

“We can’t sell to Europe because Western banks won’t work with us. We hope this will change once the sanctions are lifted,” said a source close to an Iranian petrochemical producer.

Oversupply in the crude oil market is also seen as another bearish factor for petrochemical producers, and this could worsen should Iran comes back to the global scene, according to Dubai-based traders. 

“Oil prices are already so volatile. If you throw Iran into the mix, crude could even plunge below $30/bbl,” a UAE-based petrochemical distributor said.

Crude prices hit a six-year low in mid-March, after slashing more than half its value from June 2014 to January 2015 on concerns over increased shale production in the US.

Saudi Arabia, the world’s largest crude exporter, is “most nervous” about the possibility of an Iranian return to the energy market, according to a polymer source based in Riyadh.

Despite its huge foreign exchange reserves, Saudi Arabia may not be able to “indefinitely withstand low oil prices”, the source said.

Saudi and its allies had conducted air strikes against rebels in Yemen earlier this week, lending support to oil prices.

“The [military action] is an artificial way for the Kingdom to raise oil prices temporarily without cutting production,” a Middle East energy trader said.

Should Iranian sanctions be lifted and oil prices fall further, OPEC may eventually decide to cut oil production in June, when it is scheduled to meet next, and just before the deadline for a final nuclear deal.

“An Iranian return could force Saudi’s hand. Riyadh may finally consider cutting production to stabilise oil markets,” a petrochemical source based in Abu Dhabi said.

In November last year, Saudi Arabia, the de-facto leader of OPEC, pushed the cartel to maintain an oil production target at 30m bbl/day despite falling crude prices in a bid to curb US shale expansion.

“But Saudi will not be able to make decisions about production on its own. Don’t forget, Iran is also a member of OPEC,” the source added.

Additional reporting by Tahir Ikram

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections