Oil markets are falling today as bearish factors exert pressure, including the potential reintroduction of Iranian crude and de-escalation of military tensions in Eastern Europe.
The US government is attempting to tame oil prices by urgently negotiating a new nuclear agreement with Iran, a move that could reintroduce more than 1 million barrels of Iranian crude into the market.
Any deal could unleash more than 1 million bpd of crude and condensate production within four to six months, or even quicker as Iran is thought to have robust oil-on-water storage.
The return of Iran’s 1 million barrels may not have the calming effect that the Biden administration hopes or expects, though, as low OPEC+ supply, increasing demand, and inflation will all keep oil prices elevated.
Although reports suggest Russia-Ukraine tensions may be cooling following French President Macron’s visit to Moscow yesterday, the fallout from the meeting is uncertain, and its impact on Russian oil production and flows to Europe are unpredictable.
But there is much more room on the market for Iranian barrels now than previously, primarily due to OPEC+ underperformance, as the group hasn’t produced at its stated target levels since summer 2021.
Higher oil consumption growth could also balance out any downside price implications of an Iran deal, as global oil demand remains on a steady track to average 98 million bpd in the first quarter of 2022.
The Omicron variant is loosening its grip on many countries worldwide, and as regulations and travel restrictions are removed, the oil demand outlook is boosted.
Oil demand for the start of 2022 has been somewhat sluggish due to seasonality and lingering Omicron impacts in the US and Europe.
The real wildcard for consumption will continue to be China, which has seen weaker than pre-pandemic trends over the Lunar New Year holiday period, suggesting the return to normal is still not a given.
Projections show a full recovery of global aviation demand is likely during 2022, consequently causing oil demand to outpace 2019 levels in the first half of this year.
Inflation may have been driving commodity prices in the short term due to the unprecedented monetary reaction triggered by the pandemic, the expected fiscal tightening in the coming months poses a downside risk to GDP growth, which has a strongly correlated relationship with oil demand.
An accelerated tightening of central bank policy has created significant uncertainty across all markets and has been a defining trait of 2022 and will likely continue to create a challenging backdrop for investors this year.
