Iran will add to the glut, but not right away
Oil markets were closed last Friday, but prices fell in electronic trade after reports of a framework Iranian nuclear deal raised concerns of added supply to an already over-supplied market. Prices were back up today with analysts estimating that Iranian crude exports could take several months to ramp up significantly.
Iran’s Foreign Minister, Mohammed Javad Zarif, said on Saturday U.N. sanctions would be lifted immediately after the deal, but the United States released a fact sheet on Thursday saying that sanctions would be lifted once Iran demonstrates compliance with any deal, reports Reuters. “Both sides will describe the deal differently,” said Olivier Jakob of Swiss-based consultancy Petromatrix.
The statement released by the Department of State says that sanction relief will only come if Iran abides by its commitments. It also notes that “Important implementation details are still subject to negotiation, and nothing is agreed until everything is agreed.”
Morgan Stanley, Barclays, and Tudor, Pickering, Holt & Co. have joined Credit Suisse and FBR Capital Markets in saying that late 2015 or 2016 are more likely target dates for Iranian oil exports. About 200 MBOPD to 300 MBOPD could slip into the markets in the near term, but a 1 MMBOPD increase is at least a year away, Barclay’s analyst Michael Cohen said.
“Even if a final deal is reached, we do not expect any physical market impact before 2016,” Adam Longson, head of oil research at Morgan Stanley, said in a report. Even if a deal is reached, Longson estimates that only 500 to 700 MBOPD of production will hit the market due to underinvestment in Iran’s oil sector, while around 30 MMBO of floating storage could also hit the market as well.
Weaker dollar and fewer rigs
Oil prices also rose on news of weaker jobs data than was expected last week, sending the dollar down. Investors delayed expectations of an increase in the U.S. Federal Reserve’s key interest rate, undoing a dollar rally that weighed on commodities prices in recent weeks, reports The Wall Street Journal.
News of a weaker dollar was joined on Friday by the most recent rig count from Baker Hughes (ticker: BHI) showing yet another week of declining rig counts. The overall number of active rigs in the U.S. fell by 2% to 1,028. The number of rigs drilling for oil declined to 802 from 813 while rigs drilling for gas fell 5% to 222 from 233.
The dollar’s turn, combined with the lower rig counts, has many speculative traders targeting a comeback for oil, said Jim Ritterbusch, President of energy-advisory firm Ritterbusch & Associates. Ritterbusch says that the dollar’s depreciation could boost international oil demand and falling production could erase today’s oversupply.
Saudi Arabia raises prices to Asia
Saudi Arabia’s state owned Saudi Aramco cut discounts to Asian markets for the second month in a row. The discount for Arab Light to Asia was cut by $0.30/bbl to $0.60/bbl less than the regional benchmark, reports Bloomberg. Arab Medium will sell at a $2.00 discount in May, an increase of $0.20/bbl from April, according to an email sent out by Aramco on Sunday.
“The drive for Aramco to raise prices is the improvement in the refining margin for gasoline and diesel,” Essam al-Marzouk, a Kuwait-based analyst and former Vice President for Europe at Kuwait Petroleum International, said. “The Saudis have established good market share in Asia and are less worried by competition from other producers than they used to be early in the year.”
The crack spread for processing benchmark Dubai crude into products has risen to an average of $15.18/bbl since the end of February compared with $11.90/bbl for the first two months of the year, according to data compiled by Bloomberg.
While Saudi Aramco raised prices for all of its crude grades to Asia, it lowered most prices for the U.S., reflecting weaker Nymex crude prices and an oversupply in the U.S. market. Trading volumes are likely to remain thin with some international markets still shut for Easter and other public holidays.
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