If presumptive Democratic candidate Joe Biden wins the presidential election in November, Iran could suddenly turn from a bullish driver for oil prices into a bearish factor if it resumes up to 2 million barrels per day (bpd) of oil exports. Currently, there is a consensus among analysts and international agencies that the oil market is tightening and will continue to tighten, lifting oil prices through next year.
Oil demand is expected to rise next year by between 5 million bpd and 7 million bpd compared to this year’s lows, according to OPEC and the International Energy Agency (IEA)—in the absence of a mass return to lockdowns. The OPEC+ group is set to further ease its collective production cuts. In theory, the current expectations of supply and demand in 2021 are bullish for oil prices.
Yet, the market shouldn’t discount one political and geopolitical factor that could upend current oil price forecasts for next year. The U.S. presidential election in November could install a new administration in the White House – of a President Biden – that would be inclined to renegotiate the Iran nuclear deal and potentially ease the current sanctions on Tehran’s oil exports.
The return of 1-2 million bpd of Iranian oil on the global market would cap oil price gains next year, a leading oil analyst said last week.
“If you have Joe Biden as president he could basically take the US back into the [Iranian] Nuclear deal and you could see a million plus Iranian barrels hit the market. These are the kind of things I think will be very important into the trajectory of oil into 2021,” Helima Croft, head of commodity strategy at RBC Capital Markets, told Business Insider in an interview last week.
If Biden wins the November election, he could be inclined to revisit and renegotiate the Iran nuclear deal, potentially easing some sanctions in exchange for Tehran returning to compliance under some revised form of the Joint Comprehensive Plan of Action (JCPOA).
“The recent killing of Qasem Soleimani, the commander of Iran’s Quds Force, removed a dangerous actor but also raised the prospect of an ever-escalating cycle of violence in the region, and it has prompted Tehran to jettison the nuclear limits established under the nuclear deal,” Biden wrote in an essay in Foreign Affairs earlier this year.
“Tehran must return to strict compliance with the deal. If it does so, I would rejoin the agreement and use our renewed commitment to diplomacy to work with our allies to strengthen and extend it, while more effectively pushing back against Iran’s other destabilizing activities,” he said.
Iran’s oil will not return overnight to the market if Biden becomes president. But the prospect of renegotiation of the nuclear deal will likely keep oil prices depressed, making Iran a bearish factor for the market. This would be in contrast with the bullish factor that Iran has been for oil prices during the Trump Administration so far, with the renewed sanctions on its oil and the occasional flare-up of Iran-U.S. and Iran-Saudi tensions in the most important oil shipping lane in the world, the Strait of Hormuz.
“But if we are talking about a recovery into the $50-60 a barrel next year, a million or even two million barrels of Iranian exports hitting the market is going to put a temporary lid on how high prices can go,” RBC’s Croft told Business Insider.
Iran’s current crude oil exports are estimated at between 100,000 bpd and just over 200,000 bpd, compared to 2.5 million bpd in April 2018, just before President Donald Trump withdrew the U.S. from the Iran nuclear deal and re-imposed sanctions on its oil.
Due to the sanctions and to the coronavirus crisis, Iran’s oil production has plummeted to below 2 million bpd in the second quarter, compared to an average of 3.553 million bpd in 2018, according to OPEC’s latest Monthly Oil Market Report (MOMR).
It’s not clear how fast Iran could boost its oil production in case sanctions are eased and exports become no longer punishable. But the Islamic Republic has a lot of oil in storage, due to the sanctions and the pandemic. In early July, Iran probably had more than 50 million barrels of oil stored in tankers at sea and more than 60 million barrels in onshore storage, analysts and industry sources told Reuters earlier this month.
Nothing is certain in the oil markets, especially in today’s global economic and health crisis, but a Biden presidency could turn Iran from a bullish into a bearish factor for oil prices.