Does It Matter When Iran Exports Again?

| About: iPath S&P (OIL)

Summary

Why it doesn't matter when Iran supplies the market in 2016.

Demand for oil in 2016 is very uncertain.

No visible catalysts to suggest a price recovery in the near term.

What will happen is price of oil does rise meaningfully.

It will take months to work down existing inventory.

source: Azernews

There have been a growing number of commentators on oil suggesting the impact of Iran on the oil market in 2016 may not be as much as the market is pricing in at this time, because of the length of time it may take to inspect and clear its nuclear facilities, and whether or not it'll be able to boost production at levels it has asserted.

The idea for many of these people is Iran is the key catalyst driving the price of oil down, and the market isn't taking into account the above-mentioned possibilities.

In other words, it is asserted it could take longer to inspect Iran's nuclear program than believed, as well as longer to bring oil supply to the export market.

The truth is this is all conjecture. I think many investors are long on oil and are getting crushed. Causing pause in the thoughts of some concerning the trajectory of the price of oil in 2016 is a way to slow down the ongoing plummet in prices, meaning influencing some to stop shorting oil and others to hold on to their positions.

My thought is it doesn't matter either way concerning Iran. It will of course have an impact when it brings supply to market, but the amount of oil being oversupplied now makes it a mute point in the months ahead.

As for demand in general, there is increasingly a cloud of uncertainty as to the levels it'll reach, and it is moving more to a less demand than originally believed.

Demand won't result in a rebalancing

One of the misguided notions as we move further into 2016 is demand for oil will rise to levels it will overcome the existing oversupply environment. That conclusion is wrong in my view.

The general outlook is for demand to climb from 1 million to 1.2 million barrels for day by the end of the year. When those projections were made, it was predicated on China increasing demand. Not only is that not likely to happen, it appears it will do the reverse, with China demand declining from prior estimates.

Even in the best-case scenario it would still only line up with what is being oversupplied at this time, which would be at best a temporary rebalancing. This doesn't include the inventory that would have to be worked through or the amount of DUC wells that may be brought into production in 2016.

Keep in mind I'm talking about Iran not bringing any oil to the export market in 2016. I don't believe that's how it'll work out, but am responding to those that think this is the likely scenario.

What if the price of oil does rebound meaningfully?

The narrative of the price of oil has to rebound because existing prices aren't sustainable is another idea that is thought to be irrefutable.

It's true that for some the price isn't sustainable for some companies, but for others they can last out the current downturn.

When someone talks about sustainable price levels, it means some competitors will have to give in and lower production and supply levels. That's the only way the market will rebalance. The obvious question is, who's going to do it. Some believe it's going to be forced on the shale producers, but that is only a strategy that can be used in the short term. Once the price of oil rises, guess what's going to happen? They will immediately boost production and bring a lot more supply to the market. The price of oil will quickly reverse direction and remain subdued.

At best oil prices could rise for short periods of time, but shale producers would respond to that.

Until a competitor blinks, which almost certainly will have to be OPEC, this is how it will play out. Either the demand for oil will skyrocket to levels everyone will win, or OPEC will eventually have to give up market share in order for supply to line up with demand.

According to IHS, if 50 DUC wells were brought into production on a monthly basis, it would generate about 123,000 barrels of oil per day. If 150 were brought into production on a monthly basis, it would add about 269,000 more barrels per day by the end of a 12-month period.

That's a rule of thumb to keep in mind as the environment changes over the next year.

In the Eagle Ford alone there were an estimated 1,400 DUC wells as of April 2015.

Drawing down inventory

Another factor is the large amount of inventory that will have to be drawn down. Even if everything were true about Iran in regard to it taking much longer to bring supply to the market than the market generally thinks, it will take months to draw down the inventory now being stored.

Even in the U.S. demand isn't keeping up with supply, which some have assumed would who tend to watch rig counts. The problem there is shale producers in particular are producing from many of their best wells. This is offsetting the decline in rigs in production.

The latest data show crude inventories jumped by 234,000 last week. It was a lower amount than expected, but still going in the wrong direction.

More important was the increase in gasoline in distillates. Gasoline builds were up 8.4 million barrels, while distillates, which include heating oil and diesel, jumped 6 million for the week. That was the highest week-to-week build since 1993.

Again, whether or not Iran brings supply to the market in the near term, it changes nothing in the U.S. as far as rebalancing.

Other catalysts would have to be found to boost oil prices.

Any catalysts out there?

Reading and listening to some analysts, I get the sense of some panic when talking about the price of oil and presumed catalysts. It's like they're getting desperate. More than likely they are because the firms many represent are sure to have many clients in oil, based upon the "unsustainable" price of oil, while probably being sold as it being close to reversing direction.

For that reason we may see a lot more pedantic observations which will have little effect on the price of oil.

Unless there is a geopolitical event that disrupts supply, I don't see anything outside of OPEC lowering production and supply that will have a significant impact on the price of oil.

Russia isn't going to stop production and U.S. inventory will have to be worked down before that changes the supply/demand equation.

Conclusion

Investors should be wary of creative ideas proffered in order to provide a better price outlook for oil than current data suggest.

In the case of Iran bringing more oil to market, it's going to happen, and even if it takes a little longer than the market believes at this time, it won't have an impact on the price of oil; although it could give it a temporary boost if it is found the export time frame isn't a near as supposed.

If Iran was found to be in violation of agreements, that would change my thesis over the long term. The idea it would do so seems preposterous. I suppose that's possible, but it's highly unlikely.

With that in mind, we should keep our eyes on the supply and demand outlook as it stands, and not get too distracted by endless possibilities that could support oil prices if they were to happen.

It doesn't mean we should totally ignore them, but the only way they could have any real impact was if a number of ancillary possibilities came to fruition in the same time period. I'm not going to base my analysis and investment decisions on these type of remote possibilities.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.