Crude: Zip, Zero

June 27, 2018 08:35 AM
Daily Energy Market Analysis

The U.S. State Department laid down the gauntlet as the United States threatened to slap sanctions on countries and companies that don’t cut oil imports from Iran to “zero” by Nov. 4. That’s right, zero, zip, nada you name it. There will be no waivers granted at this point and the United States is going to issue penalties to those that decide to buy Iranian oil.

This will put the screws to the Iranian regime that is already facing a new upstart of protests from some Iranians who are sick and tired of the poor economic conditions in the republic. The Trump Administration's move will not only isolate the rouge regime but could cause a collapse of its economy--which is already under severe pressure due to mismanagement--and the funding of wars in Syria and Yemen, not to mention the funding of other terrorist organizations.  

This comes right after Saudi Arabia pledged to ramp up output in July to a record 10.8 million barrels a day, though some reported that they could produce close to 11 million barrels a day. The Saudis are saying that they won’t exceed their quota and they will put the extra oil in storage but the timing of this suggests that the Saudi’s are getting ready to help keep the market supplied at a time when it will be tight due to the sanctions and the coming collapses of what’s left of the Venezuelan oil industry. The move is most likely in anticipation of the U.S. sanction on Iran that will severely tighten global supply, even though it was announced ahead of the State Department Action.

This move is going to put more economic pressure on the Iranian regime than we have already seen. Almost no one will stand by Iran despite the EU’s hope that they could keep the Iranian nuclear deal intact. Crude oil companies and many countries will not want to face the possibility of U.S. wrath. The State Department official said allies in Europe and Asia already had been warned, and trips to China, India and Turkey were in the works, according to The Wall Street Journal.

The article in The Wall Street Journal reports that banks’ reluctance to deal with Iran is already taking its toll on Tehran’s oil exports. Exports have fallen to an average of 2.2 million barrels a day this month, compared with 2.7 million barrels a day in May, according to data from London-based consulting firm Vortexa. Earlier this month, Indian Oil Corp., the country’s largest refiner, said it was considering cutting Iran crude imports after a decision by government-run State Bank of India to stop dealing with Tehran. 

European refiners, which buy around a third of Iran’s oil exports, are also dropping out. Italy’s Saras refinery is considering no longer buying Iranian oil because its banks don’t want to finance such trades even before the Nov. 4 deadline, according to company officials. The company said last week it had made no final decision. European refiners say they have already started buying more oil from Saudi Arabia, Russia and Iraq to make up for upcoming reductions in Iranian oil. Meanwhile, economic woes have triggered a new round of protests in Iran, posing a challenge to President Hassan Rouhani’s government as it struggles to tackle persistent double-digit inflation and unemployment. Economic concerns in the country have been aggravated by the Trump Administration’s exit from the 2015 nuclear accord.  

Supply in the United States is already plunging as the American Petroleum Institute reported a monster 9.2-million-barrel drop in supply. The draw was stunning and major Canadian Oil sand outage that is expected to last through July will cause further tightening in the space. 

On top of that, the lack of CapX spending by big oil companies leaves them in a bad position to try to quickly bring on more supply. The shale producers can’t ramp up as supply constraints and bottlenecks keep them in a poor position to try to fill the void.  

The API also reported that gasoline supply rose by 1.2 million barrels and Distillates by 1.8 million barrels. Cushing inventory fell by 1.7 million barrels. Hedgers should get hedged. Oil is in a new super cycle and these geopolitical events are going to keep supply tight. 


About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil 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.