- 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.
HFI Research, #1 Energy Service
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