Current BHI Stock Info

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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Analyst Commentary

Global Hunter Securities, Richard Hastings 04.02.2015
The US Department of State ("DoS") this afternoon announced that "significant progress" has been made in discussions between the P5+1, the EU and Iran. There is no firm, final agreement at this time. There is a revised timetable to achieve that goal, pushing the rest of these discussions out to June 30. We emphasize that the DoS announcement is clear, that "Important implementation details are still subject to negotiation, and nothing is agreed until everything is agreed." There remain risks that a signed conclusion may not occur on that timetable, despite great efforts by the Obama Administration to achieve a signed deal. We discuss briefly our conceptual perspective on an Iran easing and what this means to the current paradigm in crude oil. Lack of future conformance would result in a "snap-back" of all sanctions. In a nutshell, a successful departure from sanctions could make Iran a corollary to the US in displacing crude oil flows from their prior, established directions. But more compelling is the chance that the US and some of the EU are looking around the corner at Iran's natgas story as a proxy to push Russia further into a corner.

Capital One Securities, Luke Lemoine 04.06.2015
Iranian uncertainty continues to impact the crude market this morning as questions remain as to how long it will take Iran to increase production once the agreement is finalized. WTI is up 212 bps and back above $50 this morning, and Brent is trading at $56.25. Any changes in production for Iran will likely not have any impact on the market until 2016 as many additional steps will remain after reaching a deal.

KLR Group, John Gerdes 04.06.2015
Last Thursday, Iran and the P5+1 countries agreed to a framework that will allow Iran to increase crude exports in exchange for restrictions on its nuclear development program. The parties expect to agree on a formalized plan in late June. Assuming a formalized agreement, we expect Iran to increase crude output by ~0.6 Mmbpd through 1H/16 assuming estimated productive capacity is ~3.4 Mmbpd. Our assessment of Iran’s productive capacity assumes minor erosion from demonstrated capacity of ~3.5 Mmbpd in late ’11. The increase in Iranian production is largely negligible to our fundamental oil market outlook given a larger-than-anticipated decline in the U.S. rig count.

UBS Investment Research, William Featherston 04.06.2015
Sanctions have reduced Iranian imports from 2.5 MMBbld in 2012 to 1.1 MMBbld currently. Assuming a final agreement in June, sanctions could be lifted in phases within 4-12 months as Iran complies with terms of the deal. In addition to ~30 MMBbls of floating storage that could be sold, the IEA believes Iran could produce 500-800 MBbld within months of lifting sanctions, adding to a market already oversupplied by ~1.5 MMBbld. Wood Mackenzie projects a more modest 120 MBbld growth in 2015; 300 in 2016; and 250 MBbld in 2017. The lifting of sanctions will only extend what we had expected to be an already slower than normal recovery for oil prices.  

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