Iranian oil exports could be set to fall, rather than rising as markets expect

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Many commodity strategists have assumed an impending Iran nuclear deal would add ~1.0mb/d of oil to global markets (USO) (XLE). Mixed messaging in recent weeks showed slowing progress; however, comments Wednesday suggest the deal could be on life support. Furthermore, supplies currently ducking sanctions to be sold into the export market may fall.

Testifying in front of Congress Wednesday, the head of the US envoy to Iran said, "we do not have a deal with Iran and prospects for reaching one are, at best, tenuous." The comments came the same day the Wall Street Journal reported Iran secured access to secret International Atomic Energy Agency "IAEA" documents, which is used to conceal information related to nuclear activities in the past. Calling into question the effectiveness of the agency tasked with overseeing Iran's nuclear activities under the JPCOA.

While a failed Iran deal would withhold incremental supply from the market, supply many expect to materialize, increased enforcement of sanctions could reduce existing Iranian supplies. Wednesday, the US imposed fresh sanctions on what it described as an oil-smuggling network "backed by senior levels of the Russian Federation government" that include Chinese companies and a former Afghan diplomat. The Treasury went on to say that the network raised hundreds of millions for Hezbollah and helped Tehran support proxy militant groups. In a separate statement, Secretary Blinken said, "we will strictly enforce sanctions on Iran's illicit oil trade."

Iran currently produces ~2.5mb/d of oil and domestic demand is often assumed to be ~1.0mb/d. Suggesting that ~1.5mb/d of Iranian crude is being exported, despite sanctions. Removing even a small portion of Iran's exports from global markets would likely send prices higher, working against the Administration's goal of lowering gasoline prices. However, in the context of rumors that President Biden is set to meet with Saudi's Crown Prince, tightening sanctions on Iran could be seen as a step towards securing additional Saudi barrels for global markets.