Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Crude Oil Price Balancing Act For The Trader Community

Commodities / Crude Oil Nov 27, 2013 - 01:32 PM GMT

By: Andrew_McKillop

Commodities

MODERATION AND EXCESS
In the immediate wake of the Iran sanctions-unwinding agreement thrown together with many unanswered question in Geneva, Sunday night, Brent crude fell $2.29 or about 2.7% to settle at $108.76 a barrel, while US-traded West Texas Intermediate was down $1.44 to $93.40, in response to the agreement. Analysts were however quick to warn that Iranian exports are unlikely to jump in the short term because key limitations on sales – including a ban on crude oil but not finished product exports to the EU – will remain in place until a comprehensive deal is reached, starting six months from now.


US and EU sanctions have had a claimed impact of reducing Iranian exports from almost 2.5 million barrels a day (Mbd) or their equivalent in refined products, to a little over 1 Mbd since early 2012. The apparent squeeze on global supplies that resulted has allowed overpriced oil to be 'normal'. This is despite a global traded energy context, outside oil, where prices are falling, often far and fast.

Apart from the Syrian civil war crisis, Egypt's unresolved civil strife, and Libya's anarchy, Iran sanctions provided a clear storyline for the oil bulls, enabling them to overprice oil in day trading. The prospects of an Israeli, US or even Saudi military strike on Iran's nuclear facilities, which are widespread across its territory, enabled the so-called geopolitical risk premium on oil, especially Brent grade which benchmarks eastern hemisphere oil trade, to attain and sometimes hold about $10 - $15 on every barrel against US WTI.

Removing this premium will cut WTI grade oil prices to around $80 per barrel and Brent to around $95.

THE UNDERSIDE OF SANCTIONS
For close to 2 years, the threat of war against Iran or “Iran bombing” has buoyed oil prices. Spinoff and related trades or asset plays have included airline company fuel hedging, sometimes with unintended and very costly blowback, as deals unwound. Recurringly wrongfooted by elevated oil price volatility on global markets, their fuel price hedging strategies in some cases, as for Ryanair in 2011-2012, were non-performing and uber-costly.

Today's prospect of lower oil prices has already buoyed airline shares in companies such as IAG which owns British Airways and Spain’s Iberia, rising 3.1% and Easyjet up 2.5%. Main losers were of course the oil majors, with BP and other majors down about 0.5%.

Tucked away in the long and detailed US White House press release reviewing key points of the Geneva agreement, this will either suspend or scale back sanctions targeted at oil tanker shipping and insurance. This group of sanctions had numerous impacts, some of them “perverse”. While some analysts such as Fereidun Fesharaki of FACTS Global Energy believe the unwinding measures could lead to a rapid increase of between 200,000 and 400,000 b/d  (0.2 – 0.4 Mbd) in Iranian exports, the oil price impact is less sure.

Iraanian oil exports, claimed to have been reduced by a whopping 1.5 Mbd due to the sanctions (from 2.5 Mbd to 1 Mbd) were likely not cut by anywhere near that amount, in the opinion of many analysts, such as the Pegasus Consulting group of Karachi. They were however cut in price, that is the average “sanctions discount” applied in illegal or “sanctions-busting” trade. Dubai's so-called Dhow Trade, for example, may have transported an average 40 000 b/d out of Iran all through the sanctions regime, only as very small cargos, at prices as low as $50 per barrel. Other sanctions-busting transport and trade of Iranian oil is detailed by the IMO (former INCO), concerning large and very large crude carriers.

Between $50 a barrel and the present $93 for WTI there is a lot of room for arbitrage. One reason for global oil market prices declining that has had little attention from analysts is that EU imports of refined products from Iran – not crude – may increase rapidly. Again we have no consensus among analysts, but the major feature is that EU oil demand is weak, the continent's ability to import more oil (crude or products) without a major decline in price is low, thus the Brent price and the Brent premium against WTI look set to take a lot of flak. Put another way, the Brent price, by percent, has further to fall than WTI. Prospects for little or no price differential remaining, after the correction, are high.

IRAN OIL TRADE AND POLITICAL RELATIONS
Existing and previous diplomatic spats between the western partners to Iran sanctions (the US and EU), and the major Asian buyers of Iranian oil led by China, India, South Korea and Japan, are now set to taper down. All of them enjoyed what were politely called “waivers” on sanctions intensity and timelines for compliance with US-led sanctions. Their recent and apparent compliance was spurred by the oil tanker transport insurance and regulatory sanctions, and was in fact partly avoided through regrouping small-volume cargo shipments out of Iran, further down the coast, or across the coast of the Gulf, for onward shipping to the Asian final buyers. These buyers can now openly and rapidly step-up their imports of Iranian crude using their own-flag shipping.

For India, a major buyer whose government has wilfully published underestimates of Indian imports of Iranian crude since early 2012, the coming relaxation prompted relief, due to officials fearing a further decline in Iranian supplies. India “traditionally” buys about a fifth of all Iran's oil exports. Iran’s oil export sanctions had reduced New Delhi’s imports from Tehran by about a third. Anand Sharma, Indian commerce and industry minister, said his country had a “very special relationship” with Tehran and would now be “seriously taking all those measures which can improve our trade with Iran”.

This understates India's constant and permanent opposition to Iranian sanctions from the start. Like Pakistan, Israel and North Korea, India developed and exploded its own national atomic weapons outside the NPT, in India's case in 1974. It has no time or patience for Western hypocrisy on the nuclear issue. Indian cultural, historical and economic links with Iran are longstanding and Indian officials say they are only waiting for the green light to release due payments for supplies of Iranian crude already delivered. Very close behind India, China will do the same, followed by the other Asian buyers.

The Asian buyers will drive a supertanker through any vestiges of the sanctions that may remain after the Sunday agreement in Geneva. As India's ONGC (oil and gas commission) has frequently stated, it is ready and willing to move into Iran, to stop the decline in Iran's oil production capacity, whenever it is politically feasible.

THE TRADERS IN A QUANDARY
The Emerging economies dependent on imported oil headed by China and India, in 2012 attained a larger role in world oil consumption than the developed OECD countries. While the OECD countries continue to “taper down” their oil needs and consumption, this is not the case in the Emerging economies despite a sharp cutback in oil demand growth rates since 2008.

As Indian political leaders have repeatedly said, they can use every additional barrel that Iran can produce and export when sanctions end. In addition, they are poised to work with Iran to enable it it to rapidly stop and reverse its oil production decline.

This sets several major questions for the “trader community”, more interested in algorithms than basic supply-demand fundamentals. For the traders, Iran sanctions seemed permanent, like QE or the growth of Facebook share “value”, but they now have to painfully readjust to a thing called the real world. In that strange real thing, Iran is a major oil producer probably able to achieve 5 Mbd output in a short period of time going forward. Its historic peak was 6.6 Mbd in 1976.
Taking account that the claimed impact of sanctions on its net export surplus were exaggerated, and net exports did not fall to “a little above 1 Mbd” under sanctions, its rebound potential measured in net export terms has probably been underestimated. This oil will primarily be shipped East, not West, meaning that the eastern hemisphere benchmark price – Brent – has to fall more than WTI. Facing up to this reality may be painful for traders, who have doggedly attempted to rebuild and relaunch the Brent premium against WTI in recent months.

To be sure, oil is the No 1 commodity trade and therefore the most price-manipulated. To what extent and how fast the “trader community” will bend to reality, however unwelcome that reality is, will be a spectacle we can watch on a daily basis.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

Andrew McKillop Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules