Market Talk: 'Two months at least for any form of normalcy' in oil markets

[00:00:00]The US and Iran sign a deal, but what will it mean for the oil markets?

[00:00:07]The US has agreed to end its blockade of Iranian ports, wave sanctions on Iranian oil, and unfreeze some Iranian assets.

[00:00:15]While Iran will open the Strait of Hormuz without tolls for at least 60 days. All that is in an agreement that has been signed by both the US and Iranian presidents. And oil prices have fallen to their lowest since the war began. But how has the conflict changed oil markets? Navindas is a senior oil analyst at Kepler. Naveen, let's start with this extraordinary in many ways agreement by the US to wave sanctions on Iranian oil. How much appetite is there in the market to buy Iran's crude?

[00:00:42]>> If we It feels like a long time ago, but if we go back to the start of this war, I think part of the calculus from the US was to ultimately get to a point where Iranian oil was freely flowing. I think the mandate for sort of lower energy prices globally was a strong one and potentially more so than the nuclear angle to this whole war. So, I think the market will have a little bit of trepidation in initially and to make sure that after 60 days that all the since the right protocols are in place and sanctions are fully lifted on Iranian oil, and then the process of establishing credit lines and the financing infrastructure to deal with Iranian oil will begin.

[00:01:25]So, initially the Chinese buyers will still remain in pole position for Iranian crude oil, but I think very rapidly, if this agreement holds, there will be wide appetite and you know, wide need I would say globally to source the qualities and the volumes of oil coming out of Iran.

[00:01:44]>> How much supply could Iran add to global markets? How much impact could this have on prices?

[00:01:48]>> Well, I first and foremost I think for Iran there's there's a twofold approach.

[00:01:52]One is the amount of oil that we could see in seaborne markets. So, how much more can they export than they are doing currently or pre-war? And the second factor is what sort of investment is required for them to boost their outright production.

[00:02:08]So, I think in the very near term, we will see the unlocking or the oil has been made available that is currently sitting in floating storage.

[00:02:17]You know, somewhere north of 60 million barrels that can be readily accessed.

[00:02:21]And pre-war, the export levels from Iran were sitting around 1.8 million barrels per day. We believe in the short term, this could marginally rise to around 2 million barrels per day on a sustainable basis.

[00:02:35]But I think more in the medium term and longer term, we need to see the investment landscape improve for there to be more financing within Iran's oil fields to push that production up.

[00:02:45]>> The agreement is also supposed to open the Strait of Hormuz from this weekend, but is shipping traffic moving? How nervous are ship owners to send tankers through?

[00:02:54]>> Well, first and foremost, this is the most positive news we've had since the start of the war.

[00:02:59]But there is still a lot of uncertainty when it comes to shippers.

[00:03:03]And I think what we need to see is the more, let's say, risk-prone or those shippers that are available or able to take that risk move in first. And I think that inflows into the Strait of Hormuz, vessels going in, is the key to this. I think if we see sustained move movements both in and out for the likes of, let's say, 5 days to a week, confidence in the shipping community will incrementally increase.

[00:03:29]Now, secondary to that, we need to make sure that the right insurances are in place, that the vessels can say, move around the world to get into place to to re-enter the Strait of Hormuz. So, all of this will take some time, and these levers will all be pulled at the same time as confidence incrementally increases. So, whilst, you know, transit or traffic may be, let's say, fully open from this point in time, we should see confidence only really come back in an incremental fashion and the supply chains will move in toward that. For us to take maybe, let's say two months at least to get back to any form of normalcy.

[00:04:08]>> What if Iran tries to charge a toll on the strait or other fees? It only seems to have agreed not to do so for 60 days.

[00:04:15]>> And that's the big risk, I think, hanging over this agreement is whilst the market is feeling quite comfortable right now and, you know, there's a lot of optimism, it really does depend on all the different kinks that need to be ironed out in this agreement. And as you mentioned, what happens after the 60 days? Because if there is some form of toll mechanism, suddenly the market, and especially Gulf countries, will start to feel a little bit of pushback towards this because the power dynamic and the financial power dynamic that Iran would then hold is, I would say, unacceptable to several countries in the region.

[00:04:53]>> Gulf countries have tried to get oil, of course, by other means, including the Saudi cross-country pipeline to the Red Sea. How much have they reduced the long-term importance of the strait?

[00:05:02]>> I would say relatively considerably and not only has there been, you know, you know, sustained and maximum level pipeline flows since the start of this war, the investment decisions for alternative pipelines in many different countries in the region have also essentially been accelerated so that we may see more pipelines coming online in 2027 and, you know, in the next few years as well.

[00:05:27]With the fragile nature, let's say, of this agreement, it's very conceivable, and we believe at Kepler, that the these bypass pipelines will be used at full capacity even when, let's say, this agreement is fully ratified, let's say, after 60 days, which means that we don't necessarily need to see Hormuz transits back to 100% I think a balanced market would would exist with Hormuz transits somewhere around 75 to 80% with all these bypass pipelines and alternative export ports are working at full capacity as well.

[00:06:05]>> That was Nivedita of Kepler. Don't forget you can watch more videos on reuters.com.