Oil drops 3% on Iraq-Turkey deal, but Brent stays above $100

Oil prices plummeted over 3%, reversing most of the previous day's significant increases. 

The decline in oil prices followed the Iraqi government and Kurdish authorities ​reaching an agreement to ​restart oil exports through Turkey's Ceyhan port.

The deal offered minor reassurance regarding Middle East supply worries.

At the time of writing, the West Texas Intermediate crude oil was at $92.54 per barrel, down 3.1%, while Brent was 2.2% lower at $101.07 a barrel.

Brent had fallen below $101 per barrel briefly earlier in the day.

Iraq's oil flows

Oil flows from the Ceyhan port were anticipated to commence at 0700 GMT on Wednesday, according to a statement by Iraq's oil minister, Hayan Abdel-Ghani, reported by state media. 

This follows previous reports from two oil officials last week that Iraq planned to pump a minimum of 100,000 barrels per day of crude through the port.

The Iran conflict has severely impacted Iraq's main southern oilfields, which are the source of most of its crude production and exports. 

As of March 8, production has plummeted by 70% to just 1.3 million barrels per day (bpd).

This drastic reduction is a direct result of the conflict effectively shutting down the vital Strait of Hormuz, a choke point through which approximately 20% of the world's oil is transported.

Even with the latest development, Brent crude oil prices were consolidating above $100 per barrel on Wednesday. 

“With no sign of de-escalation in the Middle East, the market continues to consolidate above this key level,” Warren Patterson, head of commodities strategy at ING Group, said in a note. 

Oil flow still restricted

Oil flows are mostly restricted, notwithstanding optimism that Iran might permit more tankers to pass through the Strait of Hormuz, particularly to certain nations. 

However, Iran may severely limit the number of tankers granted passage if its objective is to drive up energy prices.

Meanwhile, the confirmed death of Iran's security chief, Ali Larijani, is unlikely to lead to de-escalation and is instead increasing market uncertainty.

Iran's new supreme leader has reportedly rejected offers for de-escalation that were conveyed by intermediary countries, according to a senior Iranian official.

The United States military announced on Tuesday that it had targeted sites on Iran's coastline near the Strait of Hormuz.

This action was taken because Iranian anti-ship missiles were deemed a threat to international shipping in the area.

Iranian actions continue to target energy infrastructure across the Persian Gulf, exemplified by multiple attacks on the UAE’s Fujairah port.

Simultaneously, upstream production is decreasing as producers attempt to mitigate limitations in storage capacity.

Reports indicated significant oil supply reductions, with the UAE and Kuwait reportedly cutting as much as 1.5 million bpd and 1.3 million bpd, respectively. 

These reductions are in addition to the substantial reported cuts from Iraq and Saudi Arabia, which stand at approximately 2.9 million bpd and 2-2.5 million bpd.

Refined products market elevated

The refined product market continues to trade at extremely elevated levels amid disruptions in crude oil and refined products.

Concerns are escalating in the middle distillate market, as evidenced by the ICE gasoil crack surpassing $45 per barrel. 

“The move has been even more extreme in the jet fuel market with the jet regrade trading above $400/ton,” Patterson said. 

“The European jet fuel market is heavily exposed to Persian Gulf supplies; around half of European imports come from the region. In addition, around 23% of the global seaborne jet fuel trade moves through the Strait of Hormuz.”

Asia's increased exposure to naphtha flows in refined products accounts for the naphtha crack shifting from its typical discount to a premium in the region. 

Furthermore, ethylene margins are significantly negative because feedstock prices have recently risen.

This situation is expected to lead crackers to reduce their operating rates.

“The only way we’ll see refined product cracks normalise is with a resumption of crude oil and refined product flows through the Strait of Hormuz,” Patterson added. 

“Until then, markets will continue to tighten as refiners are forced to reduce operating rates amid feedstock shortages.”