The Phil Flynn Energy Report
Taking Iran Into Account
Oil futures are stagnating despite a very friendly American Petroleum Institute (API) supply report. The market is still concerned that Iranian oil will flood the market, even though Secretary of State Antony Blinken doesn’t think that Iran will comply with the terms of the agreement that world powers are trying to negotiate. He also promised close consultation with Israel about any potential U.S. return to a nuclear deal between Iran and world powers. Reports that Iran is getting ready to ship a lot of oil are making their rounds.
Yet, while more Iranian barrels may be bearish in the short term, it still might not be enough to meet the coming summer demand surge, where oil market spreads are suggesting a very tight supply outlook. There’s also news that even if Iran does get the green light to produce, the OPEC+ cartel may adjust their output to compensate for those extra barrels.
Overnight, Alexander Novak, former Energy Minister and now the Deputy Chairman of the Government of the Russian Federation, says that the group “Need[s] to consider possible oil output growth in Iran,” which he says may be approximately 1 million barrels of oil per day (bpd). That could be setting the stage for an OPEC+ cut at their June 1 meeting. There’s still no word on whether Russia will submit a plan for compensation cuts on their part for their overproduction.
Iran and Saudi Arabia are trying to improve relations and Russia is talking about an adjustment. It looks like we’re headed towards a harmonious OPEC+ meeting, assuming those that have cheated on production offer up some compensation cuts.
Iraq, for one, may have a hard time doing that: it was pointed out in the Financial Times today that the Covid-19 situation almost brought down the entire Iraqi economy. The FT reported the following:
Ali Allawi, Iraq’s finance minister, found himself in a quandary last year as the spread of coronavirus cut demand for oil and prices tumbled. Allawi’s treasury, which receives more than 90 per cent of its revenues from crude sales and spends 45 per cent of its total budget on salaries and pensions, suddenly didn’t have enough money to pay millions of public employees and retirees.
OPEC’s second-largest producer borrowed billions of dollars, mostly from local banks, to bridge the shortfall. But public anger boiled over. The fallout of the virus then battered businesses as their most important customers — public employees — cut their spending.
Iraq’s economic fragility was laid bare: the hit to both public and private sectors caused the country’s gross domestic product to shrink 11 per cent in 2020 according to the IMF, and poverty rose amid worsening unemployment.
The FT also points out that “[t]he International Energy Agency has warned of the drastic impact that pursuing a net-zero emissions target by 2050 could have. OPEC’s share of world production would rise to more than half of the total, as oil and gas supplies become concentrated among a smaller number of countries, but annual per capita income from these commodities could fall by as much as 75 percent by the 2030s.”
Yet, this scenario — a huge fall in revenues as demand for Iraq’s oil drops — isn’t just a pandemic phenomenon, it’s the future for oil-producing countries. The FT says that “Among those least prepared include Iraq, Libya, Venezuela, Equatorial Guinea, Nigeria, Iran, Guyana, Algeria, Azerbaijan, and Kazakhstan, according to the World Bank. These nations have not diversified exports or shifted their economies towards non-polluting industries. Most have been mired in war, plagued by widespread poverty, or unable to secure international investment to drive a shift away from fossil fuels. Many of them are also among the most vulnerable to the real-life effects of climate change.”
This also adds to the possibility of global instability if the world moves too quickly to reach its goal of carbon neutrality. As I’ve said before, aggressive government policies to move to a carbon-free world will fall mainly on the backs of the poor, who will suffer the most in the rush to get to net-zero emissions.
The API crude draw might’ve been bigger, but a big draw in Cushing, Oklahoma and big draws in products make this a bullish report. The API reported that crude oil supply eased down by 439.00 barrels. Yet Cushing was down by 1.153 million barrels and gasoline supply down by 1.986 million barrels. Distillates were down by a whopping 5.137 million barrels.
Out of India, NDTV reports the following:
Ships at anchorage have been asked to move to a safer area in the sea while oil and gas installations will go into ''survival'' mode as they brace for cyclone Yaas to make landfall at north Odisha-West Bengal coast.
Cyclone Yaas, equivalent to a category 3 hurricane, is the second severe storm in the span of about 10 days to hit Indian coasts. The cyclone is set to make landfall sometime Wednesday evening.
A major contingency plan has been put in place to mitigate the impact of the cyclone on oil and gas installations, an official statement said.
Odisha coast has two major ports at Dhamra and Paradip and a huge oil refinery at Paradip. West Bengal hosts a major port at Haldia.
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