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Jul 23, 2023

Oil Slides on Hopes of Venezuela, Iran Sanctions Relief

WASHINGTON (DTN) -- Nearby-month delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange softened early Monday, pressured by the prospects of

WASHINGTON (DTN) -- Nearby-month delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange softened early Monday, pressured by the prospects of easing sanctions on Venezuelan and Iranian oil exports, while the "higher-for-longer" narrative on U.S. interest rates reinforced by Fed Chair Jerome Powell at the Jackson Hole symposium further dampened buying interest for the oil complex.

Investors in the broader markets reassessed the path of U.S. interest rates after Federal Reserve Chairman Jerome Powell signaled the central bank is prepared to lift interest rates further and keep them at a restrictive level until inflation falls to its 2% target.

Powell, delivering the keynote address at the annual symposium in Jackson Hole, Wyoming, signaled that further rate hikes will likely be required should inflation fail to moderate in coming months. "As is often the case, we are navigating by the stars under cloudy skies... At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data," concluded Powell. Although headline inflation in the U.S. eased to 3.2% last month from its peak of 9.1% in June 2022, Powell warned that the risks of reacceleration are still embedded in the economy.

Following Powell's hawkish remarks, markets raised the odds for another 0.25% rate increase at the Federal Reserve's Nov. 1 meeting, according to the CME Fed Watch Tool. A majority of investors now expect the terminal interest rates in the United States to climb to a 5.50% to 5.75% target range by year's end.

The re-pricing of U.S. interest rates has lifted the U.S. Dollar Index to a near three-month high 104.06 against the basket of foreign currencies, pressuring the front-month West Texas Intermediate contract that traded near $79.67 bbl. The international crude benchmark Brent contract slipped $0.33 to near $84.15 bbl. NYMEX ULSD futures fell back $0.0749 to $3.2326 gallon and NYMEX RBOB September futures slid $0.0540 to $2.8764 a gallon.

Further pressuring the oil complex, the narrative of tightening physical market has been somewhat eroded by the prospects of easing sanctions on Iran and Venezuela, with media reports indicating the Biden Administration is in direct talks with officials from both OPEC nations. Iranian crude exports have surged to 1.5 million barrels per day (bpd) midsummer -- the highest daily average since 2013 -- with China, being an opportunistic buyer, the prime designation for sanctioned Iranian oil shipments.

Iran's oil production is estimated to have climbed above 3 million bpd in recent months, up from 2,500 bpd seen in 2022. Tehran produced more than 3.8 million bpd back in 2018 - a year before the Trump Administration slapped harsh sanctions on Iranian oil exports.

In comparison, the Biden Administration has been rather lax about sanctions enforcement on Iran in an effort to lower oil prices in the aftermath of the Russian invasion of Ukraine in March 2022.

Additionally, the Biden Administration has reportedly drafted a proposal to lift oil sanctions on Venezuela in exchange for the re-start of democratic processes in the Latin American country of 28 million. Venezuela's oil production plunged to 450,000 bpd at its low in 2020 before recovering to about 800,000 bpd over the June-July period.

Liubov Georges can be reached at [email protected]