Crude Fails to React to Likely US Policy Shift on Iran

Helima Croft thinks Iran and Venezuela will have a huge impact on the market beginning in May. File Image / Pixabay

It may be a delayed reaction, but crude on Wednesday failed to react in any meaningful way to the imminent possibility of U.S. president Donald Trump scrapping the Iran nuclear deal: West Texas Intermediate edged up slightly by 25 cents to settle at $60.96, while Brent also climbed by 25 cents to settle at $64.89 per barrel.

The modest gains - the first of this week - followed a report from the Energy Information Administration that U.S. crude stocks rose by 5 million barrels, the biggest jump since late January - a far cry from the 2 million barrel build pundits had been expecting; however, there was also a larger-than-expected large distillate and gasoline inventory draws, which, added together, were twice as much as the crude build.

Gene McGillian, manager of market research at Tradition Energy, said of the EIA report, "I don't think we have a clear set of directions, and I don't think this report gives that much of an insight as to whether the rebalance continues or not; we continue to just chop around here."

Also keeping a lid on prices Wednesday was the Organization of the Petroleum Exporting Countries (OPEC) stating in its monthly report that supply from non-members is likely to grow by 1.66 million barrels per day (bpd) in 2018 due largely to rising U.S. supply, almost double the growth it predicted in November.

OPEC also calculated that demand for its oil must be 33 million bpd for the rest of 2018 to get rid of any remaining oversupply.

But as John Kemp, marker analyst for Reuters, pointed out, the most noteworthy aspect of Wednesday's trading was that Trump's decision to replace his secretary of state with a more hawkish figure - which observers widely believed would precipitate the end of the Iran nuclear deal and remove a substantial number of barrel from the market - "barely registered on the spot price of Brent crude."

Kemp added that "the six-month calendar spread continued to soften, suggesting that traders see little impact for the moment."

Part of the reason for the indifference may be due to the difficulty the White House faces in ditching the deal and re-imposing sanctions: Kemp stated that they include resistance from European countries, and there is also the possibility traders appreciate that any loss of crude from Iran "would be made up by increased production and exports from Saudi Arabia, Kuwait, the United Arab Emirates, Iraq, and Russia.

Still, at least one pundit maintains that Mike Pompeo as the new secretary of state will have "very big implications" for the global oil markets: Helima Croft, global head of commodity strategy at RBC Capital Markets, said his appointment will likely be the "nail in the coffin" for the Iran nuclear deal and spur additional sanctions on Venezuela.

She told CNBC's Futures Now, "With Pompeo, a known hawk taking the top diplomat job, I could see Trump easily making the decision to not renew sanctions waivers on May 12 effectively ending U.S. participation in the Iran nuclear deal."

As for Venezuela, she described the situation in the Bolivian republic as "a clear and present danger to get worse and have more barrels of oil removed from the market."

Croft concluded,"We're really going to have to get to May for the market to really believe that these risks may materialize; I think that's when it could become pretty monumental for the oil market."

If remarks made earlier this week are any indication, John Kilduff, founding partner at Again Capital, seemed to agree with Croft that it will take time for these geopolitical events to have effect: he said, "You've got to jump through a couple of hoops to get there, or connect a couple of dots to make that a bullish story for oil, but at the same time there's been a lot of tensions."