Iran Talks Ongoing While Physical Crude Market Deals With Black Market Barrels
Summary
- 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 Iranian barrels that magically appeared out of nowhere, and the reduced Chinese buying from others is having its ripple effect across the world.
Our thinking is that with China's materially lower buying from others in April and the fact that we are seeing global oil-on-water still draining, this Iranian crude oil game won't last long.
The reason being is that as the overhang in the other barrels get bought and stored, and with demand recovery still continuing albeit choppier than previously expected, sooner or later, China will have to buy from others. This will then return things back to normal and push spreads higher.
The question again is obviously timing, but we think it's still sometime around the end of April when we see crude starting to go back higher. This timing also coincides with the end of Chinese refinery maintenance.
For now, it doesn't appear that the US/Iran will agree on anything in the near term. But regardless, the oil market is already having to contend with higher Iranian supplies.
As for energy equities, we're seeing signs of a bottoming pattern forming. We have issued a trade alert for subscribers on Suncor (SU) and Cenovus (CVE).
HFI Research, #1 Energy Service
For energy investors, the 2014-2020 bear market has been incredibly brutal. But as the old adage goes, "Low commodity prices cure low commodity prices." Our deep understanding of US shale and other oil market fundamentals leads us to believe that we are finally entering a multi-year bull market. Investors should take advantage of the incoming trend and be positioned in real assets like precious metals and energy stocks. If you are interested, we can help! We are now offering a 2-week free trial, so come and see for yourself!
This article was written by
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (17)
