Oil Tumbles as Iran Premium Fades

Oil has fallen below $99 a barrelon reports that "major powers" are expected to issue a statement Friday on the possibility of resuming nuclear talks with Iran.

View of Iran's oil industry installations in Mahshahr, Khuzestan province, southern Iran.
Kaveh Kazemi | Getty Images
View of Iran's oil industry installations in Mahshahr, Khuzestan province, southern Iran.

As of mid-morning trading, prices on the February WTI contract—which expires Friday at the end of the floor session—and nearby March contract had reached session lows of $98.05 and $98.18 a barrel, respectively.

Since November of last year, U.S. oil prices have hovered around $100 a barrel on heightened geopolitical risks in Iran. Controversy over Iran’s nuclear program, followed by Iranian military drills in the Strait of Hormuz—a key waterway that carries 30 percent of the world’s seaborne oil—helped send prices above $100 a barrel. That's until now.

"We are ready to take off some of our Iranian premium," Petromatrix energy analyst Olivier Jakob wrote in a note to clients on Thursday and he reiterated that call Friday, saying Iran has "started to have a softer voice about potential action in the Strait of Hormuz, a voice that was later welcomed by the United Arab Emirates. Iran also claims that it is ready to take part again in nuclear negotiations."

Also European Union officials are expected to announce an agreement on the embargo of Iran oil on Monday, analysts and traders say these may prove to be toothless sanctions.

"The EU embargo on Iran to be decided on Monday is basically useless until the first review in three months from now. If new negotiations are to take place between Iran and the West then the EU will want to officially announce an embargo, then claim that the negotiations are a result of the announced embargo and in three months the EU will have the option to cancel or not the embargo directive," Jakob wrote.

India and Iran have also reportedly agreed to settle some oil sales in rupees, so that would be another way to circumvent EU and U.S. sanctions. "This is one of the first times oil has been settled in a currency other than dollars. It's a major coup for the Iranians," says Again Capital founder John Kilduff, adding its also another reason for an unwinding of the Iranian risk premium in oil prices.

Also pressuring prices, the U.S. Energy Department on Thursday announced that U.S. oil demand is at a 15-year low and gasoline demand is at an 11-year low, highlighting the fragility of an economic recovery in the world’s largest oil consumer.

March WTI futures are the most active contract (Feb expires today), and is now trading below 50-day moving average ($99.10).

Analysts say the next key technical level is in the $97.80-$97.90 a barrel range.