Oil Pressured by Ukraine Peace Talks, Iran Supply Fears

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures remain under pressure on Friday while headed for a weekly loss as the prospect of increased Iranian oil exports offset fears of a potential supply disruption resulting from an escalation of the Russia-Ukraine crisis.

At 14:33 GMT, April WTI crude oil is trading $88.36, down $1.68 or -1.87% and April Brent crude oil is at $91.32, down $1.65 or -1.77%. The United States Oil Fund ETF (USO) is trading $63.22, down $1.95 or -1.48%.

Geopolitical Risk Premium Waning

For weeks, WTI and Brent crude oil prices have been underpinned by speculators betting the conflict between Russia and Ukraine would escalate into a full-blown war, but this week’s price action suggests that traders remain unconvinced especially with diplomatic conversations taking place.

Although the markets are down on Friday, the price action this week was choppy, while driven by Russia-Ukraine headlines.

Helping to put a lid on prices is hope for an easing of geopolitical tensions after news of talks between the United States and Russia over the crisis in Ukraine.

Underpinning prices were comments from U.S. President Joe Biden, who warned Thursday that there was a “very high” threat that Russia would launch an invasion of Ukraine “within the next several days” as the Kremlin sent Washington a memo complaining bitterly its demands for security guarantees were being ignored, and again threatening a “military-technical” response.

Fresh Iranian Oil May Not Ease Short-Term Supply Tightness

A deal taking shape to revive Iran’s 2015 nuclear agreement with world powers lays out phases of mutual steps to bring both sides back into full compliance, and the first does not include waivers on oil sanctions, diplomats say.

Envoys from Iran, Russia, China, Britain, France, Germany, the European Union and United States are still negotiating details of the draft accord amid Western warnings that time is running out before the original deal becomes obsolete. Delegates say much of the text is settled but some thorny issues remain.

The broad objective is to return to the original bargain of lifting sanctions against Iran, including ones that have slashed its crucial oil sales, in exchange for restrictions on its nuclear activities that extend the time it would need to produce enough enriched uranium for an atomic bomb if it chose to.

Short-Term Outlook

There is little chance of Iranian crude returning to the market in the immediate future to ease current supply tightness so we expect that supply will remain considerably below the long-term average for several more months.

However, this is likely to lead to a widening of the spreads between nearby crude oil prices and deferred crude oil prices. Tight oil supplies pushed the six-month market structure for Brent crude to its widest backwardation on record on Wednesday.

Backwardation exists when contracts for near-term delivery are priced higher than those for later months and is reflective of near-term demand that encourages traders to release oil from storage to sell it promptly, Reuters said.