Oil drops Monday on fears sanctions relief can lead to increased Iranian oil exports

Oil prices started the week with another drop, pressured by the prospect of Iran adding oil to an already oversupplied global market. 

U.S. and Iranian officials are hoping to reach a tentative political agreement on Tehran’s nuclear program before an end-of-March deadline. This could give way to increased Iranian oil exports and would be bearish for prices, which are again under pressure after several weeks of relative stability.

Negotiations between the U.S. and Iran are set to resume on Monday, while Western diplomats say serious negotiations over substance would still be needed in the months ahead before any international sanctions on Iran can be lifted.

April dated Brent crude on London’s ICE Futures exchange fell 0.7% to $54.28 a barrel.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in April traded down 0.9% to $44.44 a barrel.

Last week, Nymex crude fell 9.6% to a six-week low. Brent crude lost 8.5% and has been down for two consecutive weeks.

Barclays analysts said that the perception that sanctions relief will lead to more oil on the market could pave the way for crude’s next move. “This supports our bearish view, and we see little likelihood of a bullish market reaction to developments in this space,” they wrote in a report.

However, sanctions won’t be removed at once.

“Even in a best-case scenario on sanctions relief, a sea change in Iranian oil exports is unlikely until after June,” Barclays says.

On Friday, the International Energy Agency, an influential energy watchdog, warned the oil market remained vulnerable amid persistently high U.S. production and soaring oil inventories.

According to Baker Hughes Inc., although the number of U.S. oil drilling rigs—a proxy of production—has been falling in recent months, the rate of the decline has slowed, dropping by 56 to 866 last week. This implies U.S. oil producers are slowing the rate at which they cut production capacity, although the impact may take several months to show in the actual output.

Nymex reformulated gasoline blendstock for April—the benchmark gasoline contract—fell 0.7% to $1.7496 a gallon, while ICE gasoil for April changed hands at $518.50 a metric ton, down $5.25 from Friday’s settlement.