U.S. President Barack Obama and Iran’s Hassan Rouhani must build on their weekend phone call to convince crude traders that a thaw in relations will open the way to increased oil exports.
While the historic conversation Sept. 27 will probably limit gains in prices, any “long-term” declines for crude will depend on the success of negotiations aimed at curbing the Persian Gulf nation’s ability to enrich uranium, according to Nomura Holdings Inc. For Citigroup Inc., the differences between the two nations are likely to weigh on talks even as some countries, such as India, seek to boost imports from Iran.
The phone call was the first time since the 1979 Iranian revolution that leaders of the two countries have spoken directly. During the 15-minute exchange, conducted via interpreters, the presidents “expressed their mutual political will to rapidly solve the nuclear issue,” Rouhani said on Twitter. Rouhani entered office last month, pledging to roll back U.S and European sanctions targeting Iran’s oil and financial industry.
“The peace chat between the U.S. and Iran will keep a tight lid on crude prices amid ebbing geopolitical tensions in the Persian Gulf” in the short term, Gordon Kwan, regional head of oil and gas research at Nomura in Hong Kong, said by e-mail yesterday. “Long term, unless Rouhani can secure the blessing of Supreme Leader Ayatollah Khamenei to abandon the nuclear program, the geopolitical premium on the oil price will return to haunt the energy markets.”
West Texas Intermediate, the U.S. benchmark crude, dropped 4.9 percent in September, the biggest monthly loss since February, as concern receded that the U.S. would attack Syria, an ally of Iran, over the use of chemical weapons and after Rouhani told the United Nations General Assembly last week his nation was ready to enter talks “without delay.” He maintained Iran retained its “inherent right” to enrich uranium.
Oil prices may fluctuate as U.S. lawmakers debate federal spending plans that might force a government shutdown if an accord can’t be reached. WTI crude for November delivery retreated 54 cents, or 0.5 percent, to settle at $102.33 a barrel today on the New York Mercantile Exchange after capping three weeks of losses on Sept. 27.
Rouhani’s UN visit coincided with the resumption of negotiations on access to Iran’s nuclear sites with the International Atomic Energy Agency in Vienna. Talks with the monitoring agency are set to continue next month.
The phone conversation “should be a calming measure, but it’s premised on the ability to move forward in the process,” Michael Stephens, a researcher at the Royal United Services Institute in Doha, said in an interview yesterday. “Yes, things are positive, things are looking better. But this is a first step. We have 10 more to go, maybe more.”
A full removal of sanctions would enable Iran to access markets and would be “bearish” for crude prices, Morgan Stanley analysts including Adam Longson wrote in a report today.
Iran has accumulated significant oil inventories since the U.S. and European first imposed sanctions, and “the sale of crude in storage may flood oil markets” if those curbs are removed, the bank said. Morgan Stanley said it was “skeptical of any sudden resolution” to lift sanctions.
The goodwill between Obama and Rouhani may be tested today as the U.S. President hosts Israeli Prime Minister Benjamin Netanyahu for meetings in Washington. Netanyahu, voicing doubts about Rouhani’s overtures, told reporters in Israel yesterday that he’ll “tell the truth in the face of the sweet-talk and the onslaught of smiles.”
Two years of U.S.- and European Union-backed sanctions on Iran’s oil and financial industries have cut the country’s shipments abroad to half their level before the measures began, according to International Energy Agency data. Restrictions on the shipping, financing and buying of Iranian crude have slowed flows to developing economies such as China and India.
An improved working relationship could reverse some of the more than 1 million barrels a day of oil production lost because of the sanctions, while a longer-term solution to curbs on Iranian exports is unlikely to come soon, according to Seth Kleinman, a London-based analyst with Citigroup. Iran pumped 2.57 million barrels a day in August, compared with 3.57 in August 2011, data compiled by Bloomberg show.
“A tangible improvement in relations would see Indian and other emerging market countries’ take of Iranian crude increase over a few quick months, bringing half of the lost million barrels per day back,” Kleinman, head of energy strategy at Citigroup in London, said by e-mail yesterday. “Beyond that I’d expect technical issues and geopolitics to drag.”
The crippling effect of sanctions brought Iran back to the negotiating table, according to Robin Mills, who worked on projects in the Persian Gulf nation from 1998 to 2003 as an engineer with Royal Dutch Shell Plc. (RDSA)
“It reflects Iran’s weakness because the move for talks shows how sanctions have had an impact,” Mills, head of consulting at Manaar Energy Consulting and Project Management in Dubai, said by phone yesterday. “Domestically and economically, they’re in trouble.”