Oil watching for bearish news of Iran agreement

Oil Enigmas

The emerging markets are whining about quantitative easing and the Iranians are getting more desperate as their economy continues to tumble. The world is lowering demand expectations for oil and global production is close to a 15-year high. Hedge funds cut back bullish commodity bets and China’s inflation in near the lowest level in two years, yet oil is still holding its own.

It is possible that the oil market has already priced in the bearish news and the focus now is on those old bullish silver linings. The oil market is on hold on news that should crush the market, yet it is failing to make a substantial move lower. Perhaps the market is skeptical of the offer by Iran. The Iranians are feeling the heat as the sanctions are absolutely destroying the Iranian economy. Just as the EU was ready to slap more sanctions on the Iranian regime, the Iranians tried to cut a deal. Iran made an offer to suspend domestic production of medium-enriched uranium. It is doubtful that the EU will take the bait as Iran has made this type of offer before. Dow Jones report that the European Union's Foreign Policy Chief Catherine Ashton said Monday she hoped Iran would, "consider very carefully" offers to resolve the deadlock over its nuclear program. She said the EU would, "continue to put pressure on Iran to comply with its obligations."  She hoped Tehran would "soon" return to the negotiating table after the country held several rounds of inconclusive talks with international negotiators over the summer. However, she didn't say whether any new date had been set for talks.

The EU is getting ready to ban imports of natural gas to Europe. The Energy Information Administration reports that Iran is a relatively minor and strictly regional exporter of natural gas via pipelines to three neighboring countries: Turkey, Armenia and Azerbaijan. Iran supplies less than 1 percent of global natural gas exports and has no current capability to export to global markets via liquefied natural gas (LNG) export terminals. Such capability is years away.

Turkey receives more than 90 percent of Iran's natural gas exports under a long-term contract. Armenia and Azerbaijan have swap arrangements with Iran that account for 6 percent and 3 percent of Iran's natural gas exports, respectively. Armenia exports electricity to Iran to compensate for the natural gas volumes it receives. Azerbaijan repays Iran for the natural gas sent to its Nakhchivan exclave by exporting similar volumes to northeastern Iran. EIA estimates that the average revenues from Iran's natural gas exports during the period July 2011-June 2012 were approximately $10.5 million per day, or about 5 percent of the estimated $231 million per day in revenues from crude oil and condensates exports over the same period. In 2010, natural gas exports accounted for less than 4 percent of Iran's total export earnings while crude oil and condensates accounted for over 78 percent. Iran imports more natural gas than it exports. Iran's imports from Turkmenistan alone exceeded its exports during the July 2011-June 2012 period. Iran, which also imports from Azerbaijan and injects natural gas to support oil production, has some ability to divert export volumes to domestic uses.

Restrictions on the imports of Iranian natural gas could reduce the bargaining power of all three importing countries with other suppliers. Impacts on the physical availability of natural gas are likely to vary. Under current and foreseeable market conditions, Turkey cannot make up for all volumes currently imported from Iran from other sources. Excess capacity on import pipelines from Russia and Azerbaijan and at its two LNG terminals has declined as overall natural gas demand has increased, and it cannot serve all areas currently receiving Iranian natural gas. Shortfalls are especially likely to occur during the winter, when demand peaks.

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