Daily Petroleum

U.S.–Iran negotiations: Pakistani mediation seeks to prevent conflict resumption

The Trump administration signaled optimism regarding the prospects of an agreement to end the conflict with Iran, but combined this tone with visible economic tightening, including the non-renewal of sanction waivers on Iranian and Russian oil suspended on offshore platforms, as well as warnings about secondary sanctions on buyers of Iranian crude. Pakistani mediator Marshal Asim Munir arrived in Tehran on Wednesday to try to narrow differences between the parties, with a new round of talks possibly taking place as early as this weekend.

Why it matters: The market interprets diplomatic signals with caution, given that negotiations over the previous weekend ended without a definitive agreement. Munir’s arrival in Tehran and the optimism expressed by the White House are insufficient to reduce the risk premium while the Strait continues to operate well below normal capacity.

• Nevertheless, it is important to note that the continuation of negotiations contributes to lower pricing of oil prices in financial markets compared to the physical spot market, which is trading around USD 116/bbl amid a highly stressed global balance.
• In this sense, it is expected that by the time of product delivery — in the case of the front Brent contract, June — there will be a de-escalation and a gradual resumption of normalized flows through the Strait of Hormuz.

Outlook: The nuclear dispute remains one of the main sticking points: Washington proposed a 20-year suspension of all Iranian nuclear activity, while Tehran would accept a pause of three to five years. The U.S. also demands the removal of enriched nuclear material from the country, a condition rejected by Iran. The conflict in Lebanon, where Israel continues operations against Hezbollah, adds another variable: Iran insists that a ceasefire must occur on this front, a position rejected by Israel and the U.S.

• Amid difficulties in reaching a definitive agreement, rumors confirmed that Tehran and Washington are considering extending the temporary ceasefire by two weeks as a way to ease pressure for the formalization of a peace resolution.
• Iran signaled that it could allow free navigation of vessels through the Omani side of the Strait should an agreement be reached to prevent renewed conflict, but this condition remains tied to the conclusion of a broader pact.
• Israel’s Cabinet met to discuss a possible ceasefire in Lebanon, with Lebanese sources confirming that negotiations are underway, with no defined timeline or duration.

What to expect: The market remains in a wait-and-see mode, with hopes for a short-term agreement fading again, supporting today’s price advance.

• Investors should now remain attentive to negotiations between the parties — a factor that is likely to continue adding volatility to prices.
• It is important to remember that as time passes and a definitive peace resolution fails to materialize, financial contracts are expected to increasingly price in physical market conditions, which tends to restore the premiums lost in recent weeks.

 

DOE reports a decline in U.S. oil inventories

Moving in the opposite direction of the figures released by the API the previous day, DOE data pointed to a decline of 900 thousand barrels in U.S. commercial crude inventories. In addition, a drop of nearly 5 million barrels was also recorded in strategic petroleum reserves (SPR).

Why it matters: The sharper decline in crude inventories, after weeks of increases, reflects the initial impacts of the Persian Gulf conflict on the U.S. oil balance, with more Asian countries seeking U.S.-supplied energy, ensuring record annual export levels last week.

• It is worth noting that commercial diesel and gasoline inventories also declined, by approximately 3.1 million and 6.3 million barrels, respectively.
• In the case of diesel, the drawdown was driven by a significant increase in exports and sustained high domestic consumption, weighing on inventories.
• For gasoline, the sharp decline in imports combined with still-strong demand (even amid higher prices) contributed to the deficit balance of the fuel over the past week.

What to expect: At this point, supply shocks from the Persian Gulf to Asian and European countries are beginning to more clearly impact the U.S. market, contributing to a faster drawdown of U.S. inventories amid maximized energy commodity exports.

• Thus, it is expected that the continued closure of the Strait of Hormuz will result in increased pressure for the U.S. to ship greater volumes of its production abroad, contributing to a faster reduction of commercial reserves, even amid growing releases from strategic reserves as approved in coordinated action by IEA countries.
• At the same time, diesel and gasoline differentials to crude are expected to remain supported, as inventories of these products continue on a faster downward trajectory.