Russia, Saudis, and Iraq Tipped to Benefit from Iran as Oil Output Hits Post-Soviet High

Tuesday October 2, 2018

Hedge funds reportedly doubt that Saudi Arabia can replace the loss of Iran crude exports as a result of the U.S. sanctions against the Islamic republic, but Bloomberg on Tuesday stated what some analysts believe is obvious and rings true regardless of Iran's impact on the market: that Saudi Arabia, Iraq, and Russia are in the strongest position to fill the gap and profit from Iran's misfortune.

In a think piece for the news agency, reporter Anthony Dipaola noted that the Saudis and Russia can produce the heavy, sour crude that many Asian countries rely upon Iran for in order to create jet fuel, diesel, and other middle distillates.

Dipaola also reiterated claims from both countries that the Saudis have a production capacity of 12.5 million barrels per day (bpd) and Russia could add about 300,000 bpd in order to help offset the Iranian losses.

In fact, on Tuesday it was revealed that the former Soviet Union produced a record 11.35 million barrels of oil and condensate per day in September, which is an increase of almost 150,000 bpd from August.

Matthew Sagers, managing director of Russian and Caspian energy research at IHS Inc., remarked, "No surprise about Russia's growth in capacities during the cutback, as investment continued apace, and so did upstream activity; this has created an 'overhang' that will be further tapped in 2019."

As for Iraq, it has added 230,000 bpd of production this year to reach a record 4.66 million in September.

Dipaola also noted that although the U.S. light crude is not suitable to compensate for the bulk of Iranian exports, he points out that buyers can still purchase it and blend it with heavier crude, after adjusting their refineries.

But none of this is alleviating the worries of hedge fund managers, according to John Kemp, energy and commodities analyst for Reuters, who pointed out that they "are increasingly betting Saudi Arabia and its allies cannot or will not replace all the crude lost from the market" and have increased their combined net long position in the six major petroleum contracts by another 50 million barrels in the week to September 25.

He added that "Bullish long positions now outnumber bearish short ones by a ratio of more than 12:1, and the imbalance is rapidly closing in on the record 14:1 back in April," with the bullishness concentrated almost entirely in Brent rather than West Texas Intermediate or refined fuels.

Kemp worried that the enormous concentration of long positions "creates a significant risk of a short-term price reversal if and when fund managers attempt to realize some of their profits following the rally."

The chasm between what crude producing nations say they can do and analysts who think the contrary is growing and was exacerbated earlier this week when Russia declared that production of hard-to-recover oil is expected to rise by 10 percent to 860,000 bpd this year.