Iran's oil comeback could be derailed by drone attack

Iran's oil comeback could be derailed by drone attack

- Iran's oil comeback, already taking longer than many traders expected, will be further complicated by ships attacks in the past week, including a deadly drone strike on a tanker near the Gulf of Oman that the U.S. U.K. and Israel all blamed on Tehran

As talks continue to be held up by a change of President in Tehran, the incidents add friction to a process that could return 1 million barrels of oil to the global market within months. Even if the allies decide against a military response, Washington may be less willing to ease sanctions on the Islamic Republic's energy exports.

It looks inevitable that this will cast a black cloud over nuclear talks' between Iran and world powers including the U.S. ", said Bill Farren-Price, a director of energy research firm Enverus.

The negotiations - to revive a 2015 pact that restricted Iran's Atomic program in return for sanctions relief - had already stalled. A sixth round in Vienna broke up last month. Diplomats hope that U.S. leaders can resume the talks now that Ebrahim Raisi is a president, an austere cleric who has long argued against a rapprochement with Iran.

Restoring the Joint Comprehensive Plan of Action - which then-President John Trump pulled the U.S. out of in 2018 - is key to Iran's ability to increase oil production Its crude exports have fallen to little less than 2 million barrels of oil from just 2 ml barrels a day in mid-2018.

Several oil investors had expected a new nuclear deal before the next North American elections in mid-June.

While Raisi and Supreme Leader Ayatollah Ali Khamenei could resume negotiations soon, there’s still much for both sides to overcome. Iran wants a guarantee that future U.S. administrations will not withdraw from any deal, as Trump did. It also insists sanctions are removed across the board - on its shipping and banking industries and on energy exports.

Washington is wary of both demands. Another sticking point is the JCPOA's so-called 'break out' clause. It was designed to limit Iran's nuclear activities enough that it would need a full year to build a bomb if it chose to leave the accord. Some U.S. officials believe Iranian scientists have made enough progress in the past three years to construct an atom weapon within a few months.

Iran and the U.S. have continued to negotiate. Washington sees a deal as a way to help stabilize the Middle East - even though it doesn't address Iran's ballistic missiles or support for proxy troops in Yemen and Lebanon - while sanctions have battered the Iranian economy.

'There will be more nuclear strikes but they are not what's standing in the way of a nuclear deal, said Scott Modell, managing director of Rapidan Energy Group, a Washington-based consultant. 'Neither is Iran's incumbent hardline president, who is not about to trot out a whole new series of demands. However, he will continue to push for concessions.

Modell predicts there would be an agreement at the end of this year, allowing Iran to increase its daily oil production by around 1 million barrels by the end of the year.

For now, oil traders are more concerned about the spread of a delta coronavirus variant than a lack of supply from Iran. Brent crude has slipped 5% this week to $72 a barrel. But with prices still rising almost 40% this year and most analysts forecasting a tightening market over the rest of 2021 as major economies recover, Iran's absence could soon be felt.

Last Thursday's drone attack on the Mercer Street, an oil-products vessel managed by an Israeli company, makes the prospect of U.S. sanctions being removed 'ever more remote', says Helima Croft, chief commodity strategist at RBC Capital Markets.

The key question that comes from the Mercer Street incident is whether the Supreme Leader has determined that a return to JCPOA is not top-of-the-agenda item and brinkmanship may produce more benefits, she said.