The US's exit from a comprehensive deal to rein in Iran’s nuclear enrichment programme is likely to throw a spanner in the works of a global pact to lower oil inventories that had led to a two-year collapse in oil prices, analysts said.
“This will give another reason to the Opec, non-Opec agreement to be perhaps revised one way or the other, either totally scrapping or phasing it out,” said Iman Nasseri, managing director, Middle East at energy consultancy Facts Global Energy.
On Tuesday, US President Donald Trump made good on a campaign promise to rescind the US' approval of the Joint Comprehensive Plan of Action (JCPoA) signed under his predecessor Barack Obama that sought to restrict Iran’s nuclear enrichment programme, and at the same time relieve its sanctioned economy of EU embargoes.The widely anticipated move by Mr Trump sent prices of Brent and West Texas Intermediate - benchmarks for crude - into a tizzy, with the former reaching $77/barrel on Wednesday, and the latter continuing its rally beyond $70/b.
Iran, a founding member of Opec is the Middle East’s third largest producer of oil and has the largest proven reserves of gas globally. The discovery of oil in the country at the turn of the previous century led to a frenzy among the oil industry's largest players to hunt for reserves across the Middle East.
While Tehran made early advances in refining and petrochemicals, much of its oil wealth remains untapped due to its ageing infrastructure and lack of finance, owing to its seclusion under the sanctions. Aside from crippling the country's economy, sanctions limited the ability of Iran's 100-year old refineries from producing higher-grade refined fuel, forcing it to burn low-quality diesel that contributed to high air pollution levels.
The green light given to Iran under the JCPoA to raise its production capacity through foreign investment and exporting to international oil markets coincided with Opec and sovereign producers outside the group led by Russia agreeing to slash output by 1.8 million barrels per day from the start of 2017.
Under the pact Iran, was exempt and allowed to raise its production, which had fallen to 2.8 million bpd under the sanctions era to pre-sanctions level of 3.9 million bpd. After reaching its desired target, Tehran slashed production, with output currently averaging 3.81 million bpd in compliance with the global pact, which has since May 2017 been extended into this year.
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The global effort had been one of the causes, apart from loss of production of Opec member Venezuela and geopolitical tensions in the Middle East that led to rallies in the prices of crude this year.
However, observers reason that when Opec and non-Opec convene mid-year to gauge metrics to drive global inventory levels down and consider the duration of the pact, they might be looking for an early exit clause, given half a million Iranian barrels will soon be off the market.
“If the oil market does tighten much more and much faster than expected because sanctions disrupt substantial Iran crude supplies, the Opec/non-Opec combined may find itself at a crossroads of contemplating an exit far sooner than it had expected,” said Vandana Hari, founder and chief executive of Singapore-based Vanda Insights.
Ms Hari does not expect however for the Opec-non-Opec deal to collapse, particularly not because of Iran’s desire to relieve itself of any obligation to comply.
“Iran cannot afford to alienate itself,” she added.
Opec has yet to officially comment on the ramifications for the pact on the US’ exit from JCPoA and how it’s likely to accommodate Iran's compliance once sanctions come into effect in August.
Opec’s supply-cut strategy, which achieved a record compliance of 149 per cent in March is “far more significant” for the group than Iranian sanctions, said Spencer Welch, oil markets and downstream director at London-based IHS Markit.
“The supply-cut deal took a lot of negotiating to put in place," he said, adding, "likely they would be very cautious before changing policy, particularly if there is a chance that Iranian sanctions could suddenly change again.”