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Iran Talks Ongoing While Physical Crude Market Deals With Black Market Barrels

Apr. 07, 2021 4:42 PM ETCVE, SU, USO, UCO, SCO, BNO, DBO, USL, OIL, OILK, SU:CA, CVE:CA17 Comments


  • While Iran and US dish it out on how they can go back to the JCPOA, the oil market already is having to contend with ~1.5 mb/d of crude/condensate exports.
  • This leaves an extra ~1.2 mb/d left for Iran to export if all sanctions are lifted.
  • Physical oil market remains weak as the black barrels make their way into the market, and with no sanction enforcement, this will continue.
  • But total global oil supplies continue to fall making China's game of chicken with the oil market using Iranian barrels temporary at best.
  • As for energy equities, we are seeing signs of a bottoming pattern forming. We have issued a trade alert for subscribers on SU and CVE.
  • Looking for a helping hand in the market? Members of HFI Research get exclusive ideas and guidance to navigate any climate. Learn More »

We've said it before and we're going to say it again.

Iran is the biggest bearish headwind this year for the oil market. It's currently exporting ~1.5 mb/d of crude/condensate with most if not all of it going to China. Iran has an export capacity of close to ~2.7 mb/d meaning another ~1.2 mb/d will be exported if all sanctions are lifted. The other 1.2 mb/d of additional exports will likely go to India, which means Iraq and Saudi will lose out on this market share.

With all of that being said, Iran/US informal talks today look like any other political talks, "constructive and ongoing." The question for us is more or less, will it be this month or will it be after the Iranian presidential election in June. Rouhani, the current President of Iran, will very likely lose the incoming election with hardliners taking over. But as Nelson Wu of Open Square Capital cautioned me yesterday, the degree to which hardliner actually wins will have an impact on the incoming talks with the US.

No one will know for certain what the political outcome is and the timing is far from certain, but one thing we do know that's already happening is that Iran is not hiding the fact that it's smuggling oil out now.

Pre-Biden and during the Trump era, Iran was smuggling out at most ~800k b/d. So the 700k b/d or so the increase is actually now showing up in the tanker data that we can observe.

As you can see, this volume has been wreaking havoc on the physical oil market in the form of lower backwardation.

Again, none of this should come as a surprise to you as we've cautioned everyone on this three weeks ago. For now, the market is having to contend with the excess

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This article was written by

HFIR profile picture
HFI Research is focused on investment ideas within the energy sector. The goal is to find contrarian opportunities in the oil and natural gas markets. Members of the investing group Learn more.

Analyst’s Disclosure: I am/we are long SU, CVE. 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.

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Comments (17)

PT Larry profile picture
Many thanks for the article.
trade alert to add or trim SU and CVE pls ?
I presume trim
I presume add.
@fundydoc My 2 cents, both coming up to earnings. Both should be helped by better crack spreads. CVE CEO has pre-announced a "noisy" quarter with merger write-offs. Market seemed non-plussed but might still react to the reality. SU still trading real cheap compared to CNQ and pre-Covid levels. For quite a while the options were trading with high volatility and tight spreads, but earlier this week the volatility came in and the spreads in the C market got stupid wide, so you're on your own there. My plan is to maintain positions (modestly long), not sell volatility unless the price picks up, and trade the outcome of earnings release.
@DrT thx for your reasoned comments
shaner1 profile picture
Good call HFIR, Almost time to buy.

Bullish... bullish... bullish... suddenly bearish LOL. Nothing can stop oil price rise and then...

Same story different day for the last 5 years.
@HFIR - appreciate the update on this evolving issue. Here we go again...

Curious to know why you haven’t mentioned any of the oilier names here, but focused on the integrated? Do you see any near term downward pressure on the likes of MEG, BTE, GXE or others? TIA.
HFIR profile picture
@bmrfan holding the other names you mentioned. Using integrated to trade.
I do not see how more Iranian crude or condensates or whatever will do anything but lower oil prices.
cenc profile picture
Think this a big old none-issue. Iran is at least a year away from any sort of lifting sanctions, plus whatever time they need to start repairing their infrastructure. That is the best case scenario the Iranians can hope for, especially considering it looks the Israel hit their military ship stationed off the coast of yemen. That chart looks pretty seasonal right now, tied to the Chinese refinery maintenance.

It is this simple. Oil investors, and none-opec oil companies, need to sit tight and ride the volatility for the next months, as the world not only burns through the overhang of storage, but the slack available in OPEC+, as demand comes online.

OPEC+ is in trouble, they need a higher price, and won't get that until all the slack is out of the system. My guess there is about 7 million bpd more in slack out there, but probably less. Remember, in previous crashes, we had Venezuela. They are not going to be able to add anything this time.

OPEC plus, has not been able to sink a whole lot of money in to maintaining productions. It will take them a while to catch-up to the demand Tsunami coming, and they have all been hit hard by the pandemic. They got long-term systemic pandemic damage to deal with, as they all ran up way too much debt.

I am guessing WTI sees something around $75 before the end of the year, but most the international oil companies are fine at $50+ for 2021, while OPEC+ burns through their slack and storage. Early 2022 is where the action will be at for $75-$100 a barrel, as that slack runs dry. the none-opec tradable players, that are not trying to support a dictatorship, are essentially doing to OPEC what they tried to do to the american frackers last time. That is the real game of Chicken right now. Can they stay disciplined, longer than OPEC+ can hold off cutting production more?
This is a black box with sanctions, ballistic missiles technology, maybe nukes involved, and much internal local politics; hopefully cooler heads prevail to de-fuse situation overall; the US consumers and investors surely don't need crude oil at $200 to strangle the US and European economies, including the rest of the world; this would be a disaster
OTT Equity Analysis profile picture
Looks like US is ready to drop most of the sanctions on Iran and withdraw troops from Iraq.
@OTT Equity Analysis does anyone really believe Iran isn’t getting all exports out via intermediaries?
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