Crude surges on supply concerns as US withdraws from Iran deal

SINGAPORE (ICIS)–Crude oil prices surged by more than $2/bbl in late afternoon trade in Asia on Wednesday on worries that Iran’s exports would be curtailed following a decision by US President Donald Trump to withdraw from the Iran nuclear deal and re-impose sanctions on the Middle Eastern country.

At 09:15 GMT, US crude for June delivery rose by $2.05/bbl to $71.11/bbl, while Brent crude for July delivery was up by $2.19/bbl at $77.04/bbl, rebounding from sharp falls overnight.

Crude futures had a volatile trade on Tuesday before closing lower by $1/bbl, following Trump’s decision on the Iran nuclear deal, but analysts had predicted the decline would be temporary.

Iran is OPEC’s third-largest producer with an output of about 3.8m barrels per day, making up around 4% of global oil supply.

Trump said on 8 May that the US will withdraw from the Joint Comprehensive Plan of Action (JCPOA), better known as the Iran nuclear agreement, reached in 2015 between the six world powers – the US, UK, France, Germany, Russia, China – and Iran.

“The President’s announcement was widely telegraphed over the past few months. However, his language today [8 May] was more hawkish than expected, emphasizing that the US would re-impose all US sanctions that were lifted as part of the JCPOA, not just those up for renewal on 12 May,” said Nomura Global Markets Research in a note.

The US Treasury Department in a statement said that “departments and agencies will begin the process of implementing 90-day and 180-day wind-down periods for activities involving Iran that were consistent with the US sanctions relief specified in the JCPOA”.

The sanctions affecting crude oil transactions and Iran’s energy sector fall into the 180-day wind-down period that should provide businesses with a six-month window to ensure compliance, according to Nomura.

“Beyond the 90-180 day window, the outlook is less certain. The President’s hawkish language has the potential to aggravate tensions in the Middle East further, potentially putting additional upward pressure on crude oil prices,” the Japanese firm said.

From the start of the year, oil prices have risen by about $10/bbl, in view of OPEC’s success at restricting supply, a strong world economy and heightened geopolitical tensions in the Middle East, according to Nomura.

“Although Iran produced only 5% of the annual oil output in 2017, a conflict in the Middle East could disrupt supply from Saudi Arabia, the UAE, Kuwait, Iraq and Qatar, which together made up 26% of world supply,” Nomura said.

“Overall, Iran’s production could be significantly curtailed if the Iran deal collapses, but not as much as it was with previous sanctions,” it said.

Hours before of Trump’s announcement, Iran’s Petroleum and Engineering Development Company (PEDEC) CEO Nouroddin Shahnazizadeh had said in a briefing that renewed sanctions on Iran would be costly, but not to the extent to worry government officials, according to Shana, the official news agency of Iran’s petroleum ministry.

PEDEC, which is the development arm of the National Iranian Oil Company (NIOC), studies and operates development projects to explore, extract, and produce crude oil, natural gas.

“[Possible] sanctions will increase our costs and cause [implementation of] our projects to last longer, but we are not worried,” Shana quoted Shahnazizadeh as saying.

“Sanctions are not good, but we are not worried and we don’t fear them…. We never welcome sanctions, but even if new sanctions grip the petroleum industry we will strongly and firmly continue our development activities, as we have already done,” the PEDEC chief said.

In a separate Shana report on 8 May, Shahnazizadeh said that PEDEC is planning to ramp up crude oil production from its Azar and South Azadegan oilfields during the current Iranian calendar year which began on 21 March.

Strong crude gains on Wednesday drove up prices of petrochemical feedstock naphtha in Asia to a fresh four-year high. Second-half June delivery open-spec naphtha prices closed on Wednesday at $681.50-683.50/tonne CFR Japan, up by $16/tonne from the previous day, according to ICIS data.

Benzene, on the other hand, were up $3-5/tonne from the previous day to $853-856/tonne FOB Korea, the data showed.

Further downstream, butadiene (BD) prices could spiral upward amid a continued spike in crude, which has a direct link to feedstock costs, according to market players.

Petrochemical market sources in Asia were largely calm after the announcement, but were also wary of the resulting heightened uncertainty.

“If the sanctions are the same as before, then, we as a country in Korea should be okay. Our oil refineries are all geared around Iranian crude so we have to receive supply,” said a source in Korea who closely monitors Iran.

“Otherwise, it will affect our industry and economy a lot and that will then have consequences in a more global context,” the source said.

Trump’s decision came as no surprise as he has long been against the Iran deal.

The landmark Iran nuclear deal was reached in 2015, during the term of Trump’s predecessor, Barack Obama. The deal, which called for the curbing of Iran’s nuclear programme, paved the way for the lifting of international sanctions against the country.

“President Trump’s decision …. formally sets US Iran policy on a markedly different course to its European allies who see the JCPOA as the best way to prevent Iran from developing a nuclear weapons programme,” said Peter Kiernan, lead analyst for energy at the Economist Intelligence Unit (EIU).

Iranian oil exports are expected to decline over time, while prospects for foreign investment in its energy sector will be diminished, in turn placing pressure on the Middle Eastern country’s oil-dependent economy, Kiernan said.

“Although re-imposed US sanctions on Iran will not have the same reach as the multilateral sanctions that were put in place to get Iran to come to an agreement in 2015 in the first place, this decision by Trump is still significant in terms of the potential broader regional impact of worsening relations between Washington and Tehran,” Kiernan said.

Focus article by Nurluqman Suratman

(Updates prices throughout, adds comments from Iran Petroleum and Engineering Development Company (PEDEC) CEO Nouroddin Shahnazizadeh in paragraphs 13-17)

Additional reporting by Helen Yan, Clive Ong, Melanie Wee, Izham Ahmad and Pearl Bantillo

Picture: US President Donald Trump announcing the US withdrawal from the Joint Comprehensive Plan of Action regarding Iran at the White House on 8 May 2018. (Source: REX/Shutterstock)