Oil Has Rallied Back to Near $50—From Here the Trend Depends on Iran Nuclear Talks

The drop in last week’s US crude oil production level sent the oil markets into frenzy today, but MoneyShow’s Jim Jubak points out that the trend now hinges on negotiations with Iran over that country’s nuclear program. If sanctions that have depressed Iranian oil exports were lifted, Iranian oil would come flooding back into the market.

36,000 barrels.

That’s the drop in last week’s US crude oil production level that has sent the oil markets into frenzy today. West Texas Intermediate, the US benchmark, closed up 4.24% today at $49.62 a barrel. The Brent crude benchmark climbed 3.01% to $56.77 a barrel.

The drop in production was such a big deal to commodity markets today because it’s the first drop in production since January. A little context, please, though: The decline to 9.39 million barrels a day comes just after weekly increases in production took US output to 9.42 million barrels a day in the week ended March 20. That’s the highest weekly production number since the Energy Information Administration started issuing weekly estimates in January 1983.

The hope in oil markets is that this weekly drop signals a long-term turning point in US production and that the trend will be down from here. That hope gets some support from another weekly drop in active drilling rigs to the lowest level since March 2011.

For the week ended March 27, the number of rigs drilling for oil in the United States fell another 12 rigs to 813, according to Baker Hughes. That’s the smallest week-to-week decline in 2015 and takes the oil rig count down 49% from its October 2014 peak. Total US rig count—that’s oil and natural gas—saw a drop of 21 to 1,048.

But recognize that the big uncertainty here is what happens in negotiations with Iran over that country’s nuclear program. If negotiations—which have now run over the self-imposed deadline—are successful, sanctions that have depressed Iranian oil exports would be lifted and Iranian oil would come flooding back into the market. Iran can boost shipments by 1 million barrels a day if sanctions are lifted, Iran’s oil minister said on March 16. The country has an estimated 7 million to 35 million barrels stockpiled for export. (Not much variation in those estimates is there?)

The oil markets should know about the results of those talks soon. At near $50 a barrel, West Texas Intermediate has bounced back to the top of its $40 to $50 a barrel recent range. From here the trend depends on Iranian oil.