Global Energy Watch| the progress of the Iranian nuclear agreement is difficult to oppose Saudi Arabia's threat to reduce production, is the rebound in oil prices "short-lived"?

21st Century Business Herald reporter Wu Bin reported from Shanghai

The Iranian nuclear agreement, which has repeatedly reached an impasse, seems to have ushered in hope, and the parties have compromised. At present, the United States has responded to the plan of the Iranian nuclear agreement, although the details are unknown, but this progress may indicate that the parties are one step closer to reaching an agreement.

But on the other hand, OPEC+ tends to cut production in the event of Iran's return to the crude oil market. After Saudi Arabia said it might need to reduce crude oil production, multiple OPEC+ members expressed support.

As the JCPOA did not match Saudi Arabia's threats to cut production, Brent crude oil returned above the $100 mark. On August 24, international oil prices rose for the second consecutive day, with light crude oil futures for October delivery on the New York Mercantile Exchange rising 1.23 percent to close at $94.89 a barrel, and Brent crude futures for October delivery rising 1 percent to close at $101.22 a barrel.

Zhao Wei, chief economist of Guojin Securities, told the 21st Century Economic Herald that since June, although the actual increase in production of OPEC+ and the United States has repeatedly fallen short of expectations, oil prices have still fallen from a high of more than $120 / barrel to near $90 / barrel, mainly related to the sharp weakening of demand expectations under recession transactions. However, after announcing a slight increase of 100,000 bpd in September, the latest OPEC+ statement further exacerbated the market's concerns about the supply side of crude oil.

There is hope for the long-overdue Iranian nuclear agreement

After several months of stalemate, the recent progress of the Iranian nuclear agreement has continued, and all parties have made concessions.

Some US government officials revealed that in Iran's formal reply to the EU, it no longer requires the Islamic Revolutionary Guard Corps to be removed from the list of US terrorist organizations, and also abandons the demand to remove a number of companies related to the military from the sanctions list.

Despite some progress, U.S. State Department spokesman Ned Price said that negotiations on the Iranian nuclear agreement are one step closer than two weeks ago, but there is still uncertainty about the progress of the negotiations, and differences between the parties remain.

Iran Atomic Energy Agency Chairman Mohammad Isrami said: "Iran is committed to accepting the inspections in the framework of the 2015 Iranian nuclear agreement, not much at all, not at all. Islami stressed that the IAEA must stop the so-called investigations and accusations before the Iranian nuclear agreement can be restarted.

Although there are still some differences between the United States and Iran, the Iranian nuclear agreement is obviously one step closer to the final conclusion, and an agreement may be reached next. The International Energy Agency (IEA) estimates that Iran is expected to add about 1.3 million bpd of additional capacity within six months of the resumption of the JCPOA.

Zhu Runmin, a senior economist in the oil industry, analyzed the 21st Century Business Herald reporter and said that the recent progress in the Iranian nuclear agreement is the result of the efforts and mutual compromise of many parties, the result of the parties' tendency to resolve disputes peacefully, and is in line with the foreign policy of the Biden administration. If an agreement is finally reached, Iranian crude oil will gradually enter the international market, which will inevitably increase supply, ease the supply tension in the past period of time, inhibit the further rise of international crude oil prices, and even drive international crude oil prices downward.

OPEC+ threatened a possible cut in production

Despite the recent increased hopes of the Iranian nuclear agreement, it is still unable to match the news that oil-producing countries have let the wind and reduce production.

It is important to note that OPEC+ is still struggling to increase crude oil production, and although OPEC+ has pledged to increase production by 648,000 barrels per day in July and August, it has produced 2.9 million barrels per day less than the target in July due to sanctions in some member countries and insufficient investment by other member countries. The situation was even worse than in June, when OPEC+ production trailed the target by 2.8 million bpd.

Although the OPEC+ production increase target has not yet been reached, it has now considered reducing production. Saudi Energy Minister Salman said extreme volatility and lack of liquidity mean the crude oil futures market is increasingly disconnected from fundamentals and could force OPEC+ to take action, including cutting production in different forms at any time.

In this regard, the well-known financial blog Zerohedge commented that it is now clear that Saudi Arabia wants Brent crude oil prices to remain in the triple digits, whether through the growth of demand or the decline in supply. We have seen lows in oil prices, and as the release of the U.S. Strategic Crude Reserve is nearing its end, we will see higher oil and gas prices.

After Saudi Arabia said it might need to take production cuts to stabilize the global oil market, OPEC + other members also began to turn the bow, and several OPEC members such as Iraq, Kuwait, Equatorial Guinea and Venezuela issued statements of support.

OPEC + production cut intention is clearly bullish on oil prices. Paul Sankey, an energy analyst at independent research firm Sankey Research, even warned that OPEC+'s offer of a possible production cut could push oil prices up to $150 a barrel in extreme cases, exacerbating the global energy supply woes.

Overall, though, the potential cuts in Saudi Arabia this week may not be imminent. OPEC+ is about to meet on September 5, which may not announce production cuts. However, if the resumption of the Iranian nuclear agreement in 2015 leads to an increase in the supply of oil markets, then there is a possibility of production cuts in the future.

Zhu Runmin analyzed to reporters that at present, Iranian crude oil has not yet opened to the international market, the international crude oil price is still at a relatively high level, OPEC + production increase target has not yet been achieved, the so-called "production cut" is too early. Even if Iranian crude oil enters the market, there is no rapid and obvious change in global crude oil inventories, and international crude oil prices do not fall deeply, OPEC+ production cuts may not become a reality. The production cuts that began in January 2017 were prompted by a deep fall in international crude oil prices below $40 a barrel. If global oil consumption does not shrink sharply, even if Iranian crude oil enters the international market, it is not so easy for the international crude oil price to fall below $60 / barrel, and it is even more difficult to fall below $40 / barrel.

Is the rebound in oil prices "short-lived"?

While recession fears are weighing on oil prices, the supply side has supported prices that are now relatively high.

In Zhu Runmin's view, global recession concerns are heating up, but its impact should not be more serious than when the epidemic broke out in 2020, and it may be difficult to avoid a slowdown in economic growth or even a slight contraction, but as long as the policies of major economies do not make serious mistakes, the possibility of a long-term severe recession is unlikely. In this case, there will not be much room for a sharp decline in global oil consumption, nor will it last too long. The global supply and demand situation is expected to improve, but it is unlikely that there will be a serious surplus.

This is also confirmed by the decline in crude oil inventories. On August 24, data released by the U.S. Energy Information Administration (EIA) showed that U.S. commercial crude inventories fell by 3.282 million barrels more than expected in the week ended August 19, well above market expectations of a decline of 1.5 million barrels. In addition, the U.S. Strategic Petroleum Reserve fell by 8.1 million barrels, the largest weekly decline in history.

OPEC Secretary-General Haytham Algais also said fears of slowing consumption were overstated, that the risk of supply shortages in global oil markets remained high this year, and that spare capacity was decreasing. OPEC and its partners have spare capacity of around 2 million b/d to 3 million b/d, or about 3% of global production.

In Algais's view, the supply crisis stems from years of underinvestment in the global oil industry, both in developing new supplies and in building refineries and other infrastructure to process oil.

Overall, supply constraints have become a medium- to long-term problem. Zhao Wei told reporters that not only crude oil, but also the supply of traditional energy sources such as coal and natural gas is not a short-term problem, and price resonance will be the norm. At the same time, extreme weather occurs frequently, and it is easy to amplify energy shortages and exacerbate price fluctuations in stages, for example, the recent high temperature weather in Europe has triggered new highs in natural gas prices.

Next, the game between all parties in the international situation will be a key factor affecting the supply of the oil market. In response to Western price cap sanctions on Russian oil, Russia is approaching Asian countries to discuss signing long-term oil contracts at a steep discount.

Indonesian Tourism Minister Sandiaga Uno revealed on social media that Russia has proposed to Indonesia "oil supply at a 30% discount on international oil prices", and president Widodo is currently considering this matter. But there are also divisions within the Indonesian government, with some fearing a possible U.S. target.

In addition, India, the world's third-largest oil consumer, relies on imports for 85% of its oil demand and is currently suffering from inflation of nearly 7% and a record trade deficit, requiring cheap Russian oil to solve its urgent needs.

For the future, Zhao Wei predicted that the rebound in oil prices may not be a flash in the pan, and high prices are still the norm. As weaker demand is expected to be gradually priced, oil price drivers will return to the supply side. As the "number one player" in the crude oil market, OPEC has a strong demand for high oil prices under the leadership of oil finance, while factors such as weak growth of Shale oil in the United States have maintained a tight balance between crude oil supply and demand. Our latest forecast models show that oil prices are expected to rise to the $110-120/barrel range.

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