Iran forgetful of past as oil prices strengthen
The upward momentum of oil prices has returned. In the week ending Sept.
14, the Brent crude price rose to $78.09 per barrel and WTI hit $68.99.
The Brent/WTI spread continues to widen significantly. From $5.50 at
the end of July and $7.60 at the end of August, it closed at $9 per
barrel on Friday. This is mainly attributed to the very low inventories
at Cushing, Oklahoma, which are 33.2 million barrels lower than last
year’s levels. This has resulted in heavy discounting of the price of
WTI at Midland compared to WTI at the US Gulf Coast. The wider Brent/WTI
spread is also attributed to concerns about the upcoming sanctions on
Iran that will take effect on Nov. 4.
Iranian oil exports have tumbled to nearly 1.7 million barrels per day,
the lowest output in more than two years. There is resulting unease that
refiners’ demand is exceeding supply. Tightness in the oil market
became evident after the price structure for Brent shifted into
backwardation after flirting with contango for most of the previous four
months, signaling a tightening of the spot market. Backwardation is
when the current price of oil is higher than a distant futures contract.
It is seen as a sign of higher immediate demand and a lower oil supply.
This week, backwardation strengthened further, with prompt-month prices
higher than forward prices. This does not incentivize the stockpiling of
crude. Backwardation market structure is a bullish factor that
increases prompt trading activities and draws down inventories. That is a
real concern when global oil inventories have already declined.
One country is trying to take advantage of the tight oil market. Iran
believes that US sanctions will be unable to reduce Iranian oil exports
to zero. Its position is that the global oil market is already tight and
rival producers cannot make up the shortfall. However, Iran has
neglected to consider Saudi Arabia’s spare capacity of 2 million barrels
per day. It has also conveniently forgotten that Saudi Arabia
substituted most of Iran’s shortfall in oil output during the 2012-2015
sanctions. Iran is behind much of the rumor-mongering in regard to the
imminent rise in oil prices. In truth, the market is tight but oil
prices are stable in the range of $72 to $78 per barrel. This is a
result of Saudi Arabia’s influence in working with OPEC+ for the good of
the global economy.
Outages in some OPEC countries are adding to the upward pressure on
prices. Though the US Energy Information Administration (EIA) reported
that Libyan crude production jumped in August by 290,000 barrels per
day, to 950,000 barrels per day, Libya’s oil production has been
volatile and unstable. Major outages at several Libyan ports in June
created anxiety that helped push up prices. Output fell from around 1
million barrels per day earlier this year to as low as 660,000 in July.
The EIA also reported that Venezuelan production sank to just 1.26
million barrels per day, continuing its freefall as a result of the
country’s economic collapse. Such low exports are tragic for a country
with some 300 billion barrels of proven reserves. Unfortunately, due to
years of underinvestment, there is currently no hope of Venezuela
raising production.
In Iraq, the situation is difficult as well. The protests in Basra,
where most Iraqi production and export facilities are located, have
created tension in such a tight market. As yet, the violence has not
affected oil production, which reached 4.55 million barrels per day in
July, and exports recently hit a record of 3.59 million barrels per day.
It takes nerves of steel to safely navigate such market conditions.
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