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There's a 'major bearish overhang' on oil markets, analyst says

An eventual de-escalation of tensions between the U.S. and Iran could unleash an untapped source of global crude oil supply and send prices spiraling lower, according to at least one analyst.

In May last year, the U.S. ended waivers exempting from sanctions countries that had at the time still been purchasing Iranian oil. The move was part of the Trump administration’s more than year-long pressure campaign to stem a key source of the country’s revenue and bring its oil exports down to zero.

In the months since, Iran has offloaded millions of barrels of oil to offshore storage tanks in ports of countries including China, outlets including the New York Times and Bloomberg have reported. This has created a build-up of supply that, if unlocked after a de-escalation between the U.S. and Iran, could drive crude prices down.

“This is a major bearish overhang on the markets,” Paul Sheldon, chief geopolitical adviser for S&P Global Platts, said during Yahoo Finance’s On the Move.

To be sure, a near-term de-escalation of U.S.-Iran tensions remains unlikely as Tehran mulls retaliation over a U.S. airstrike that last week took out one of its top military commanders. Concerns that Iran’s reprisal could hit the Middle East’s oil infrastructure have put energy traders on edge, sending Brent crude prices (BZ=F) briefly above $70 per barrel Monday for the first time since September.

A damage is seen on Iranian-owned Sabiti oil tanker sailing in the Red Sea, October 13, 2019. Picture taken October 13, 2019. National Iranian Oil Tanker Company via WANA (West Asia News Agency) via REUTERS.

But an eventual deal between the U.S. and Iran may not be completely off the table in the future, with pundits speculating both sides will ultimately attempt to avoid a full-fledged military confrontation.

And as Sheldon points out, a deal between the U.S. and Iran would likely usher in the return to market of more than a million barrels per day worth of Iranian crude exports taken offline via sanctions.

U.S. sanctions on Iran have more than halved Iran’s oil production since 2018, Sheldon estimates, with exports having decreased from around 2 million barrels per day to between 400,000 to 500,000.

In the short-term, that means any impact on Iran’s oil supplies as U.S.-Iran tensions continue to simmer won’t generate as prominent an effect on energy markets as it would have in absence of the sanctions, Sheldon said.

But in the longer-term, this creates an opportunity for payback. Namely, in the event that a U.S.-Iran deal were to occur, the sanctions-related curb on Iran’s crude production could reverse, adding even more supply to an oil market already facing a mounting glut.

“We think it'd probably take about a year for them to get almost all the 2 million barrels a day back of production,” Sheldon said. “So if that happens, we've been looking at 2021, 2022, possibly, after the U.S. election, either because a Democrat wins or because Iran realizes they need to come to the table in the event of a Trump re-election. But inevitably, yeah, this is something that is out there for sure. And this is a dramatically bearish overhang.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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