Crudites, or, My Two Cents on Oil and the Crisis in the Middle East

Middle East Crisis, oil, sectarian violence between Sunni and ShiaI subscribe to John Stephenson’s blog on strategic investment, and his August 10 posting reminded me of my mother’s words: the power struggles in the Middle East are only about oil, and who controls it.

Stephenson writes, relative to the Iran nuclear deal:

“The agreement curbing Iran’s nuclear program in return for easing sanctions is expected to lead to increased oil shipments.  Iran is seeking to produce almost four million barrels a day within seven months of sanctions being removed, expanding to 4.7 million as soon as feasible.  Anticipation that Iran will add to a global glut has been weighing on crude oil prices.  Adding to the pressure on crude oil are leading members of the Organization of Petroleum Exporting Countries (OPEC) that are pumping oil at record levels to protect market share.”

And there you have it. No wonder the Saudis are so bitterly embroiled in various proxy wars against Iran. They don’t want Iranian oil flooding the market, causing market saturation, and oil prices to thus drop. Screw the Sunni vs. Shia sectarian violence. Maybe it is sectarian on the ground, for the foot soldiers (read: embittered farmers, disenchanted youth, unemployed labour etc…), but for the leadership, it’s about power and oil.

As much as I hate the destruction of all these archeological sites in Iraq and Syria, I do take some consolation in know that they are being looted first, because ISIS’ priority is to make money, and no amount of religious fervour dulls the twinkle of cash in a jihadist’s eye. At last the items are being somewhat preserved. Maybe not oil, but certainly money.

Money. Power. Oil.

Oil runs our world, at least a third of it. The rest is mostly run on coal, with only a smattering of hydro, nuclear, and other. Those who control oil stocks hold a good chunk of the world’s cojones in the palm of their hand, and all they have to do is squeeze those oil stocks ever so gently just to get a rise out of global markets. Crude? You betcha!

______________________

Stephenson’s full text is below, as I couldn’t find a link to the blog online, and if you enjoy, I strongly encourage you to subscribe to his blog:

Crude Reality
August 10, 2015

Oil prices have now fallen to multi-months lows after the weekly inventory data out of the United States showed a small increase in U.S. crude production.  Recent government data showed that production peaked in March before falling slightly in April and May, however, the latest weekly estimate for production showed that output rose by 52,000 barrels a day to 9.5 million barrels per day.  At the same time, President Obama has begun urging lawmakers to support the proposed Iranian nuclear deal.

Crude prices have slumped in recent weeks on concerns that persistently high production in the U.S. and elsewhere could keep the global market oversupplied through the end of the year.  Output remains near multiyear highs in the U.S., Saudi Arabia and Iraq.  The Iran nuclear deal, if implemented, would lift sanctions on Iranian crude exports, allowing the country to sell more oil onto the already-glutted market.

In a speech at American University, President Obama put his political opponents on notice by warning that the consequences of Congress rejecting the Iran nuclear deal could mean another war in the Middle East.  Mr. Obama said that whether lawmakers approve or reject the Iran deal next month will determine the future of America, which is still recovering from a decade of war in the Middle East.

The deal negotiated between Iran and a six-nation negotiating bloc—the U.S., the U.K., Russia, China, Germany and France—strictly limits Tehran’s nuclear activity for at least a decade in exchange for the lifting of economic sanctions.

The agreement curbing Iran’s nuclear program in return for easing sanctions is expected to lead to increased oil shipments.  Iran is seeking to produce almost four million barrels a day within seven months of sanctions being removed, expanding to 4.7 million as soon as feasible.  Anticipation that Iran will add to a global glut has been weighing on crude oil prices.  Adding to the pressure on crude oil are leading members of the Organization of Petroleum Exporting Countries (OPEC) that are pumping oil at record levels to protect market share.

Last month, oil slumped the most since 2008 on signs the global surplus was persisting as the U.S. pumped at the fastest rate in three decades and the largest OPEC opened the spigot. Goldman Sachs Group Inc. said recently that the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall, forcing the market to adjust.

U.S. refineries have been running at the highest rate in years to process the glut of crude oil into petroleum products. But stockpiles of gasoline and other fuels rose last week, which suggests that consumption isn’t high enough to absorb the oversupply in the market.  Gasoline stockpiles were most recently expected to fall by 600,000 over the week yet they rose by 800,000 barrels, according to the U.S. Energy Information Administration.  U.S. crude inventories remain 100 million barrels above the five-year seasonal average—the highest levels since records began.

The oversupply can be seen globally and spans both crude oil and refined fuels such as diesel and gasoline.  Low crude oil prices and a seasonal pick-up in demand for motor fuels have prompted refineries to run flat-out in recent months, which could ultimately lengthen their downtime for maintenance later this quarter.

European inventories in key storages facilities are also at record highs, Singapore stocks of refined fuels are at levels last seen in 2011, and the Saldanha Bay strategic storage hub in South Africa is filling up.

Maintenance closures aside, refiners are bracing for a period of lower margins after a strong first half of the year.  Gasoline has been a superstar performer so far this year but seasonal changes should result in weaker gasoline prices.

Japan’s biggest refiner, JX Nippon Oil & Energy Corporation, has said it will cut the amount of crude it will process in August as refined product stockpiles remain high. Taiwan’s Formosa Petroleum Corp. is also making reductions.  Large volumes of crude destined for Asia have had to find alternate homes recently.  Chinese traders are reselling cargos some Angolan oil has gone into storage, while a tanker of North Sea crude that was sailing to South Korea was abruptly halted off Portugal recently before changing its destination back to the U.K.

While July was a terrible month for oil bulls, they might want to hold on tight for further turbulence.  Oil demand is heading for its seasonal lull as drivers scale down summer road trips, the air conditioning is turned down, and the world’s refineries undergo maintenance ahead of winter, stripping away factors that all lent some support to prices in recent months.

Last month oil plunged as production from OPEC countries rose to record levels while U.S. shale output has continued to prove resilient in the face of lower prices.  Turmoil in Greece, Chinese equity market tumult and a stronger U.S. dollar all combined to add additional pressure to prices.

Some of the factors pressuring oil prices are still resilient U.S. shale oil production and non-OPEC production, such as from Russia while OPEC crude oil output has increased from 30.4 million barrels per day in November 2014 to 31.9 million barrels per day in June 2015.  The lion’s share of this increased OPEC production has come from Saudi Arabia and Iraq.  According to Société Générale the increased production from Saudi Arabia and Iraq is “large, significant and bearish” for oil prices because they further delay the global oil market rebalancing.

With oil prices under pressure the logical place where energy investors have pivoted is toward the independent refiners who have managed to whether the storm rather well.  That’s because lower crude oil prices translate into lower feedstock costs for refiners.

But with no end in sight for the pressure to lift on crude and gasoline prices, I for one think the best opportunities for investors lie on the short side of this trade.

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