Brent oil on tear with Iran sanctions, Europe winters

The Brent crude versus WTI spread has blown out to the highest levels since last October surging over $20 on a combination of gluts, cuts and nuts. As U.S. refiners go into hibernation against a backdrop of weak demand, supply in the U.S. continues to rise. Refiners are cutting runs dramatically at a time when we are seeing rising Canadian oil sand production as well as shale liquids that is creating a glut of crude that seems to be getting more glutinous by the minute. Weak refining margins and the approaching shoulder season are weighing in on the West Texas Intermediate.

On the other hand, Europe scrambles as fears that the nuts in Iran may do something crazy in response to the tightening economic noose around their necks. Add to that a wickedly cold winter and Asian refiners hoarding supply, and we have Brent crude on a tear. The latest pressure comes that Barack Obama signed an executive order imposing stricter sanctions on Iran and its central bank, saying new powers to freeze assets were needed because Iranian banks were concealing transactions, the White House said. And as reported by Pen Energy, legislation proposed by U .S. Sens. Lisa Murkowski, R-AK, and Maria Cantwell, D-WA, would bar companies that engage in business or trading activity with Iran from buying oil from America’s Strategic Petroleum Reserve. The measure, co-sponsored by 16 other Senators, also calls for the U.S. Government Accountability Office (GAO) to expose sanction violators. According to Bloomberg News, "The Iran Certification and Reporting Bill, S. 2058, requires companies that want to purchase, sell or exchange SPR oil to certify with DOE that they are not engaged in any form of business activity with any Iranian entity, nor are they currently seeking to contract for any such activity. The bill follows up on concerns raised by Murkowski after the Obama administration sold oil from the SPR in June 2010 to companies known for engaging in upstream trading activities with Iranian entities. Under existing law, neither company was technically in violation of the Iran sanctions, but the Department of Energy’s decision to sell them SPR oil certainly violated the spirit of the sanctions."

These tough actions are causing an oil-buying frenzy, especially of high-quality crude so coveted by the European and Asian refiners. According to a Reuters news story published Feb. 6, “Asia's imports of crude from West Africa are at record highs, as sanctions on Iran cut supplies from the Islamic Republic to China, a Reuters survey of West African oil flows suggests. Asian imports of West African crude oil will hit an all-time high in the first quarter as purchases of Iranian oil decline and as Chinese and Indian refiners build stocks from alternative sources, trade and shipping sources said. North American, Asian and European refiners compete to buy West Africa's high-quality, low sulfur crude oil. Increasingly, it is a favorite source of fuel for Chinese, Indian and other Asian refiners. Reuters also reports that the region is a natural alternative source of oil for Asian buyers who wish to avoid sanctions imposed by the West over Iran's nuclear program that the United States and its allies say aims to produce Iranian nuclear weapons. The Reuters survey shows West African oil imports by Asian countries will average 1.81 million barrels per day (bpd) in March, 1.8 million in February and 1.84 million in January. This brings the average for the first quarter of 2012 to around 1.82 million bpd, up from a previous record of 1.79 million in the first quarter of 2011 and 2011's average 1.57 million. Not all the crude oil cargoes due to load in March from Nigeria, Angola and other West African exporters are placed yet, and the totals could rise over the next few weeks, traders say. Sources close to Chinese state-owned oil trading companies say imports of Angolan crude oil are up by as much as 20% in March from December and the increase largely reflects a decline in purchases of Iranian crude.”

Adding to that, violence in Nigeria is causing supply from that region to be questionable. Another burning pipeline may lead to a disruption of exports but Libya continues to outperform.

We can also add Europe and its winter that has been the polar opposite of what we have been having in the U.S. In fact, you might feel the polar temperatures across Europe are causing a spike in natural gas and gas oil prices. Despite the weakness in crude oil in the U.S., our heating oil and even gasoline market was driven higher by the surge in European heating fuels. As natural gas gets tight, Europe will demand more oil.

Yet, in the big picture we are seeing supply rise and demand expectations weaken. We should see a reduction in demand from both the International Energy Agency and the Energy Information Agency. Plus, the odds of Greece defaulting are rising and that could lead to a period of fear-related demand destruction. If the cold passes and if Iran miraculously calms down, look out below.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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