Brent crude headed for its biggest weekly drop since March as a potential end to years-long sanctions raised the prospects of Iran ramping up supplies.
Futures in London rose near $66 a barrel on Friday, but they remained on track for a 4.1% weekly decline. Benchmark prices climbed as the dollar fell, and prices found technical support at their late-April lows.
While Brent topped $70 on Tuesday, the market has dramatically repriced as a deal to lift restrictions on Iran’s oil exports appeared to move closer.
The Persian Gulf nation’s president, Hassan Rouhani, said world powers have accepted that major sanctions will be lifted, though details and finer points still needed to be ironed out.
Some of the most optimistic analysts estimate the country could return to pre-sanctions production of almost 4 million barrels a day in as little as three months. Iranian output has been rising this year and was about 2.4 million a day last month, according to estimates compiled by Bloomberg.
Oil has also been swept up in a broader sell-off in commodity and equity markets recently following concerns about inflation, speculation that the U.S. Federal Reserve will ease stimulus and China’s warning on measures to cool price spikes. The surge in the coronavirus continues to haunt some major consumers, with India’s largest refiner canceling a tender to buy Middle Eastern crude.
“The market is a bit surprised at how quickly they could come to a deal,” said Warren Patterson, head of commodities strategy at ING Groep NV, in reference to the Iran negotiations. There’s “potential that additional barrels come to the market much quicker than many in the market were initially expecting.”
With traders gearing up for even more supply, Brent’s nearest timespread is nearing a bearish contango structure in an indication market tightness is easing.
Negotiators in Vienna, where Iran and the U.S. have engaged in indirect talks to restore a nuclear deal, which former President Donald Trump abandoned in 2018, have taken a “major step,” Rouhani said Thursday, according to Iranian state TV.
Prior to the implementation of sanctions, Iran was producing about 3.8 million barrels a day of crude. Only Iraq and Saudi Arabia are currently producing more than that amount within the Organization of Petroleum Exporting Countries.
Still, Citigroup Inc. estimates overall global demand is strong enough to absorb any additional supply, including from Iran and that prices will continue to climb.