Tehran this week responded to a “final” proposal to reactivate the 2015 accord, and the European Union is now consulting the US on a “way ahead.” Seen as the last chance of rescuing the deal, the blueprint is aimed at limiting Iran’s nuclear activity in exchange for easing sanctions, including on its oil.
Should such an agreement materialise, Tehran could ramp up sales within months, raising supply by hundreds of thousands of barrels a day, according to the International Energy Agency (IEA). That would help alleviate a tight global market that has been shaken by Russia’s invasion of Ukraine.
The outlook of a quick return of Iranian supplies has helped keep benchmark Brent crude below US$100 a barrel this month, a level its mostly exceeded since the start of the Ukraine war in February.
Analysts say a European Union ban on Russian seaborne oil, set to take effect on Dec 5, gives the bloc added incentive to secure the Iranian nuclear deal, even as similar motivation for the US might be fading.
“When [West Texas Intermediate] prices were well north of US$100, the revival of the Iranian nuclear agreement looked like a potentially winning mid-term issue but it appears to be a less compelling case in the current price and security context,” Helima Croft, head of commodities research at RBC Capital Markets, said in a note shared with Nikkei Asia. “We would note that the Europeans are likely more incentivised to secure a deal given the looming supply shortage the continent faces when Russian sanctions come on in December.”
The Dec 5 embargo, along with Germany and Poland’s voluntary bans on pipeline imports, will displace around 2 million barrels a day of Russian oil, she added.
Vandana Hari, founder & CEO of Vanda Insights, a provider of global oil markets macro-analysis, shared a similar view. “The EU is short on alternatives if it intends to press ahead with the ban on all seaborne Russian crude imports after Dec 5. That explains why it has been actively mediating between Iran and the US in a bid to restore the nuclear deal,” Hari told Nikkei Asia. “An additional 1 million barrels per day or more of Iranian crude will be a welcome relief for the bloc. But if the deal is not revived, the EU may have to think about delaying the full implementation of the ban or resign [itself] to importing more refined products from other countries, which may include fuel made from Russian crude.”
Others warn that even if a deal with Iran is reached, it might provide little relief for oil-hungry importers.
“It should be kept in mind that no country can completely replace Russia in the global energy market,” Umud Shokri, a foreign policy adviser and energy strategist at Washington-based Gulf State Analytics, a geopolitical risk consultancy, told Nikkei Asia. “If the nuclear deal is reached, Iran’s return to the market will have a temporary effect, because a part of Iran’s oil is already available in the market.”
Shokri said there is another reason to temper expectations. “We should not forget that relations between Tehran and Moscow are at a good level, and Tehran does not want to challenge Russia’s interests in the energy market.”
RBC’s Croft sees a breakthrough on the nuclear deal as unlikely in the near-term, but others say that if and when an agreement is reached, Iran’s oil industry will be quick to respond.
“Iran could add as much as 900,000 barrels a day of production within three months of sanctions being eased, and potentially pump near its full capacity of about 3.7 million barrels per day within six months,” Iman Nasseri, the Dubai-based managing director of energy consultancy FGE, told Nikkei Asia.
With fuel demand rebounding from the pandemic, multiple countries spurning Russian supplies and most Opec members struggling to boost output, buyers would find such an influx more than welcome.