Iran News Sends Oil Prices Lower

Iran News Sends Oil Prices Lower
Rigzone's regular market watchers look at oil prices, the potential restart of Iran nuclear talks, Shell's pushback on breakup calls and more.

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)

In this week’s edition of oil and gas industry hits and misses, Rigzone’s regular market watchers looked at oil prices, the potential restart of Iran nuclear talks, Shell’s pushback on breakup calls and more. Read on to find out what they had to say.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: WTI crested the $85 per barrel mark this week as OPEC members remain reluctant to increase output at a time when inventories are low and global demand is strong. Brent crude hit $86.70 as a high for the week. However, a bearish inventory report and news that Iran may restart nuclear talks by next month sent prices lower which could end the nine-week stretch of gains. If the U.S. were to lift sanctions on Iran, as much as one million barrels per day of additional oil could hit the market. On the bullish side, traders were eyeing inventory at the key Cushing, OK, oil hub which had fallen to a three year low of 27 million barrels, 50 percent lower than first-of-year levels. A reported increase in PADD3 (Gulf Coast) oil inventories led some to speculate that crude was transported from Cushing to export terminals on the Gulf Coast. But, with a tighter Brent/WTI spread, that may have not been the case. It was (18) months ago that WTI traded in negative territory on the NYMEX.

The EIA’s weekly petroleum status report indicated that commercial crude inventories rose last week by 4.3 million barrels to 431 million barrels, six percent below the average for this time of year. The API reported that inventories increased by 2.3 million barrels while WSJ analysts called for a small 500,000 barrel gain. Refinery utilization rose to 85.1 percent from 84.7 percent the prior week. Total motor gasoline inventories decreased two million barrels and are now three percent below the five year average for this time of year. Distillate inventories declined 400,000 barrels and now stand at eight percent below the five year average. Crude oil stocks at the key Cushing, OK, hub fell 3.9 million barrels lower to 27 million barrels, or about 35 percent of capacity there, a three-year low. 1.1 million barrels was withdrawn from the U.S. Strategic Petroleum Reserve as part of the delivery of the previously announced sales. U.S. oil production held steady at 11.3 million barrels per day vs. 11.1 million barrels per day at this time last year.

AAA is reporting that retail gasoline in the U.S. continued to increase this week, hitting a new seven year high as it climbed to $3.40 per gallon while November futures hit a seven year high of $2.54 per gallon. In the U.S. stock market, future energy demand got a boost as the Dow, S&P and NASDAQ all notched new record highs. Meanwhile, the U.S. dollar has weakened recently aiding to the strength in oil prices. 

Natural gas managed to breakout above the $6.00/MMBtu mark this week on forecasts for colder weather in the U.S., but a bearish inventory reported pushed prices lower. Global natural gas prices remain high with both Europe and Asia seeing $30+/MMBtu equivalents. The EIA weekly natural gas storage report indicated an injection of 87 billion cubic feet which was above WSJ analysts’ forecast of 85 billion cubic feet as well as the five year average of 62 billion cubic feet. The deficit to the five year average for this time of year fell to 3.4 percent. Total gas in storage is now at 3.55 trillion cubic feet, ten percent below last year. Dry production last week was 93.6 billion cubic feet, while demand was 90.4 billion cubic feet, up from 86.3 billion cubic feet with the residential/commercial sector seeing the largest increase (home heating?). Exports to Mexico were 5.9 billion cubic feet while exports of LNG decreased from 10.9 billion cubic feet to 10.6 billion cubic feet.

Barani Krishnan, Senior Commodities Analyst at Well, the longs were longing for the West Texas Intermediate to get to $85, so it’s not surprising that we got $85 WTI after all. The bears were also hoping against hope that there would be some meaningful correction after almost 10 weeks of unidirectional trading. So, it’s not entirely a surprise that some exhaustion has set in at the top of the market, despite its insane momentum. The thing that came in from left field was, of course, Iran’s intent to return by November to the negotiating table with Western nuclear inspectors - a gambit that may work for the Islamic Republic this time given how hard pressed the world is for some additional oil.

Tom McNulty, Houston-based Principal and Energy Practice Leader with Valuescope, Inc: I was not at all surprised that Shell pushed back immediately when Dan Loeb’s fund Third Point called for Shell’s break-up into multiple business units. Shell’s leadership team politely, and firmly, noted that its deep and broad technical energy expertise is exactly what is required to drive the energy transition properly. The totality of Shell’s capabilities will need to be applied collaboratively, not from segregated and isolated business units. Financial players, such as hedge funds, generally do not understand energy systems. Energy in an isolated system is constant. It can be transformed from one form to another, but it cannot be created or destroyed. Shell knows this and will play a role in the development of the very processes that migrate energy supply from older forms to newer, cleaner forms.   

Rigzone: What were some market surprises?

Krishnan: The real surprise to me is that refining utilization remains well below the 90 percent norm for this time of year, dropping in the latest week to 85 percent, despite gasoline demand remaining surprisingly strong. The only explanation to me is the backwardation of the market now - i.e. longer-dated oil being cheaper than prompt - which allows refiners to delay delivery of the crude they need for producing gasoline, diesel and other stuff. It’s a tricky hedge. The market could continue rising and even the backwardated contracts may get costlier than they are now. But refiners are still taking the gamble and that explains why you have such drawdowns particularly in gasoline week after week while crude inventories have piled up by a net 17 million barrels over the past five weeks.

Crude prices also fell this time after nine weeks of rallying as Iran’s top nuclear negotiator said that Tehran’s talks with six world powers, aimed at reviving its 2015 nuclear deal, will resume by the end of November. The last time the parties met was in June. But in the grander context of the oil market, all these are fleeting factors without the promise of lasting long enough to bring a meaningful correction to crude prices. For instance, Iran’s hardline regime under President Ebrahim Raisi has constantly upended Western efforts to reign in the Islamic Republic’s nuclear program. And while U.S. crude inventories may have risen in the latest week, stockpiles at the Cushing, Oklahoma storage hub, a more important metric sometimes to the market, fell to a new three-year low.

For perspective, over the past 10 weeks, any daily correction of 1-2 percent on WTI or Brent has often been overturned by a 4-5 percent surge by the end of the week. While the current narrative in oil is overwhelmingly bullish, often the littlest of positive developments are magnified by those on the long side of the trade to blow the rally out of proportion. Helping the oil narrative is, of course, producer cartel OPEC+ whose mission is to ensure that global output of crude remains at about a fifth of immediate needs. In any ordinary market, that would be deemed as deliberate stifling of natural production to create a lopsided market. But in OPEC terminology, it’s called “rebalancing”.

Mcnulty: WTI and Brent have traded down today [Thursday], near a two-week low, but still pricey at levels above $80. The “excuse” in the market for this might be indications that there could be an Iran deal soon. I don’t think that matters because Iranian oil has always been on the market covertly. The huge U.S. crude oil stocks inventory number, up 4.3 million barrels, is more of a reason. There is a lot of crude oil production around the world that is rising, and any continued acceleration will drive prices down quickly.

Seng: U.S. oil production continues to remain in the area of 11 million barrels per day despite prices exceeding the $70 per barrel level for over a month now. The “free cash flow” mantra of publicly traded oil and gas companies continues to be the order of the day as reflected in earnings reports.

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