Despite Analytical Reasoning, Iran Fears Continue to Sway Crude Market

Wednesday April 24, 2019

As if to further challenge the prevalent fears in some analytical quarters of a global crude tightening due to the recent end of of waivers on Iran exports and on going trouble in Venezuela and Libya, the Energy Information Agency on Wednesday reported that U.S. inventories rose 5.5 million barrels last week, much more than forecasts of a 1.3 million barrel increase.

Also, the U.S. imported an average 7.1 million barrels per day (bpd) of crude  last week, up more than 1.1 million bpd from the previous week.

These disclosures had a mixed effect on trading: West Texas Intermediate  settled 41 cents lower at $65.89 per barrel, and Brent rose 6 cents to $74.57 per barrel, a modesty increase that nonetheless was enough for a new six-month closing high.

Augmenting the notion that the global crude market is in good shape, Khalid al-Falih, energy minister for Saudi Arabia, on Wednesday remarked that his country's production in May will not vary greatly from previous months: "Inventories are actually continuing to rise despite what is happening in Venezuela and despite the tightening of sanctions on Iran.

"I don't see the need to do anything immediately."

Still, some analysts think production problems in other countries combined with the Iran situation will mean the continuation of a bull market: Carsten Fritsch, commodity analyst at Commerzbank, remarked that "The factors that could lead to higher prices are overwhelming," and he added that a push towards $80 per barrel was more likely than a fall below $70.

As far as Helima Croft, head of global commodity strategy at RBC Capital Markets, is concerned, there could be trouble looming - especially for U.S. president Donald Trump, the author of the Iranian sanctions aimed at getting that country's exporting activity down to zero.

She told CNBC, "Libya is the Number One wild card: this sort of makes or breaks the Trump policy, when you have Tripoli being shelled, when you have ... this near-civil-war situation, oil's clearly at risk in that type of context, and president Trump cannot afford Libyan production to go off.

"So if we have Libyan production off and the Saudis are going to basically slow-walk a production increase, then we're really looking for an SPR release" we think that is what they'll have to do this summer."

Croft was referring to Strategic Petroleum Reserve releases, which the U.S. has only used three times, the latest being in 2011 following a series of disruptions tied to the Arab Spring.

Still, the general consensus for the time being within the analytical community is that the hang-wringing over Iran - and worries about tightening in general - may be overblown.

Larry Fink, chief executive officer of BlackRock, on Wednesday pointed out that inventory increases in the Arab Gulf states as well as in the U.S. will easily offset loss of Iranian supply: "As the (Saudi) oil minister suggested, there is greater inventory, so if there's a time to be moving forward and make the region even more secure, it looks like this is probably a very good time to do that."

Concluding this line of thought was Stephen Brennock, oil analyst for PVM Oil Associates, who stated in a note on Wednesday that the Saudis "will be relied upon to work with other producers to keep markets adequately supplied; indeed, rumors are rife that OPEC's core Arab members are readying themselves to raise output.

"As such, Trump's doubling down on his anti-Iran strategy may have a muted impact on global oil balances."