Oil spreads widen as Iran rebuffs direct talks

Draghi, Khamenei and an Oil Glut

Oil prices retreated despite the fall in the euro and a rebuff from Iran’s Supreme Leader who rejected direct talks with the U.S mainly because of fears of a growing oil glut in the United States. While Mario Draghi cooled off the red hot euro and the precious metals by saying policy makers were concerned about the euro’s meteoric rise, he showed he can move the euro with a word. First the promise to do whatever it takes and now just showing a bit of concern can break us. Yet while other commodities crumbled, the weight of growing U.S. crude supply pulled down the complex.

The Brent-WTI spread continued to widen due in part to the growing U.S. oil glut but also because of an increase in the geo-political risk trade. Iran’s supreme leader, Ayatollah Ali Khamenei, dashed hopes that there might actually be progress being made with the Iranian nuclear soap opera. After Joe Biden floated the idea and the Iranian Foreign Minister showed some interest in talking, some hoped that there would be some light at the end of the negotiation tunnel. Yet the rejection by the Supreme Leader seems that those were false hopes or perhaps evidence that the Supreme Leader is just fearful of having to be in the same room as Biden. Khamenei said, “Talks will not solve any problems, you are holding a gun against Iran saying, ‘Talks or you’ll fire.’ The Iranian nation will not be frightened by such threats.”  Iranian President Mahmoud Ahmadinejad took it a step further by saying that, “Talks are held to arrive at an understanding, not to impose anything,” Ahmadinejad said. “Such talks will be meaningless if someone raises a club and imposes” something on Iran.” (Yes, like your election.) He went on, “Talks would be productive only if they were based on mutual respect,” he said. “Things will be fine if the Americans correct the manner in which they address us.”

Yet those tough words come as the noose of sanctions continue to tighten around Iran’s neck. The geo-political risk on trade for oil is long the Brent and short the WTI. Bloomberg news reported that, "Iran, which dropped two places to become India’s fourth-largest crude supplier last year, may lose $2.5 billion of revenue as global sanctions prompt the South Asian nation to reduce purchases. Indian refiners may cut oil imports from Iran by as much as 20% in the year starting April 1 as the government seeks to keep its exemption from U.S. penalties on countries that trade with the Persian Gulf state, according to a Bloomberg News survey of five refinery officials. Iran would lose sales of at least 60,000 barrels a day of crude, worth about $2.5 billion a year, based on a reduction of that size from current contracted volumes, according to data compiled by Bloomberg. Iran Heavy for sale to Asia, the grade preferred by Indian refiners, traded at about $113 a barrel yesterday.

Behind the scenes Bloomberg reports that Japan and Saudi Arabia will sign an agreement this weekend that will allow Tokyo to make emergency requests for additional supplies of crude oil, Japan's Nikkei newspaper reported in its Feb. 8 edition. The agreement would set up a telephone hotline between the two governments to allow Japan to quickly seek additional oil supplies in the event of extraordinary circumstances such as terrorist attacks, unrest in the Middle East or a spike in the price of oil. Japanese Economy, Trade and Industry Minister Toshimitsu Motegi will travel to Saudi Arabia on Saturday to sign the pact, Nikkei said.

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