Iranian Ceiling, Saudi Floor Reinforce Rangebound Oil Market

The oil market has remained rangebound through the summer, most recently testing multi-month lows on a combination of the deteriorating macro environment and talk of an imminent Iranian nuclear deal. However Saudi Arabia appears emboldened to manage the market aggressively to avoid significant downside. T he twin fundamental drivers of returning Iranian crude and a reactive OPEC+ reinforce the rangebound oil market dynamics outlined in our previous note. Modelling the impact of additional Iranian supply and our assumed OPEC reaction on 2023 balances suggests the market would be looser by ~0.6mn b/d in 2023, with balances shifting from a 0.11mn b/d draw to a 0.53mn b/d build. We would expect this to represent ~$5-10/bbl off our current 2023 Brent forecast of $100/bbl. Compared to our base case, we would expect to see the largest downside risk over the first quarter in the “Iran return” case, with the market likely to be weighing a sharp downturn in Europe and the first ad dition of Iranian barrels. The Q3-23 rally in our current forecast would likely be more muted as marke t tightness implied in our base case eases substantially with the return of Iranian barrels. In effect, then, the return of Iran could be interpreted as a “structural SPR” which ultimately would make the loss of Russian oil from the market less concerning to Western policymakers. However, this may have unintended consequences – we have clearly noted the easing of the hawkish sanctions regime on Russian oil exports in recent months, with tweaks and adjustments easing restrictions on providing services for exports to third countries. This line of thinking has also been behind the US push to favour a price cap mechanism to keep Russian oil on the market, rather than an outright embargo. With this in mind, the return of Iran may embolden policymakers to “tighten the net” on Russian crude, in effect diluting the loosening impulse of a renewed Iran nuclear agreement.