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WTI Slumps To New Cycle Lows As Iran Supply Fears Loom

Tyler Durden's picture




 

Just a few short days ago we were the first to bring attention to the potential of an Iran nuclear deal being a catalyst for the next big leg lower in the energy complex and sure enough, not only is the market startuing to leg lower in a hurry as the deadline looms, but the mainstream media is catching on too. WTI hit fresh cycle lows this morning at $42.63 with the contango continuing to surge.

 

WTI makes new cycle lows...

 

As the contango continues to surge higher...

As Bloomberg noticed today,

Iran could raise oil exports by 1 million barrels a day without international sanctions, its oil minister said as talks resumed with the U.S. over the nation’s nuclear program.

 

“If sanctions are lifted, we can raise our exports by one million barrels per day within a few months,” Oil Minister Bijan Namdar Zanganeh said Monday in Assaluyeh, Iran. The Persian Gulf nation shipped 1.2 million barrels a day last month, the International Energy Agency said in a March 13 report.

And here is what we noted last week,

There is a possibility of a nuclear deal being agreed between the P5 + 1 nations and Iran next Friday, 20th March. This may be the precursor for energy stocks to recouple to downside and for spending cuts to spread from capex to dividends for majors.

The Iranian nuclear program and its ultimate intent is something that periodically hits the headlines, with views ranging from it being for peaceful use only to the Iranians being a "messianic, apocalyptic cult of zealots" who would try to annihilate Israel even if they were nearly annihilated in return to accelerate the advent of the Day of Judgement.
 
Our view, based on studying and translating internal Iranian legal judgments and discussions with a range of informed parties, is that Iran wishes to have a nuclear program as a matter of national pride and having nuclear weapons breakout capability as a deterrent against potential externally-catalyzed regime change.
 
Negotiations have dragged on for years, from Iran's offer to Bush to freeze the number of centrifuges they had at 164 in 2003 to today's position of Iran having almost 20,000, more efficient centrifuges and full nuclear weapons capability.
 
A confluence of political factors makes a deal highly likely at this point however.

Firstly, the USA has a stated policy of pivoting from the Middle East and Europe toward Asia. There are a number of reasons for this, but the major one is that the rebalancing of China is likely to be a fraught affair and nobody can forsee the outcome. As such, the USA would prefer a balance of power stabilising the Middle East, of which Iran and Iraq form an important part.

 

Second, a number of traditional Middle Eastern alliances such as have been frayed in recent years due to certain conflicts and clashes on a leadership basis. This is not to say that Iran, who are leading the fight against ISIS, are a prospective ally, but they may no longer be part of a defined Axis of Terror.

 

Third, President Obama is a final term President looking for some final wins. The recent letter from 47 letters in which they claimed to have the power to rewind any Iran deal ironically highlighted his ability to push through a deal if he chose on the response, with a range of parties, from Iranian lead negotiator Zarif to US government officials pointing out that any agreement would be bilateral and binding and that Obama has the power to put this in place. This has been our view for some time as the persistence of multilateral agreements, particularly those likely endorsed by the UN security council is huge, with sanctions also only working if one has assistance from a wide range of parties. Any future US leader could theoretically renege on the agreement, but this is something almost unprecedented and with minimal upside given the agreement will have clauses in case Iran steps out of line.

 

Fourth, the interim deal extensions which have rolled back Iran's nuclear breakout capability (they had lots of 20% enriched Uranium, which has now been converted to 5%, which takes longer to build a bomb from) have an initial end point at the 28th March for a preliminary deal (to be finalized end of June), with, from our sources, the technical details having already been worked out last year of how monitoring etc would work, but the political side not quite there. The Iranian new year celebrations of Nowruz start on the 21st March, putting pressure on the Iranian side to get a deal done by the 20th as the period after this is one where reaction locally will be minimal and it is generally difficult to get anything done for a while. The P5 + 1 parties are scheduled to start their latest talks on the 15th.

 

Fifth, the Iranian government has changed to a more moderate Rouhani from the more populist Ahmedinejad and the Iranian economy has stabilised dramatically, something likely to continue as they increase their influence in Iraq. It is notable that there are more American educated PhDs in the Iranian cabinet than the whole of Senate and Congress.

 

Finally, sanctions are already breaking apart on Iran as Russia has been pushed out in the cold due to what I believe is the true Clash of Civilizations. There have been numerous moves for increased co-operation between the two countries as part of Russia's push to increase its soft power in the Middle East as it fills the gap left by the departing USA and Russia is also set to sell Iran Antey-2500 anti-aircraft missiles, an upgrade on the already agreed S300 system. This is an interesting system as it offers anti-ballistic missile protection as well as anti-aircraft protection, effectively hardening Iranian nuclear sites against Israeli attack (the US could still overwhelm it)

So, with these factors it seems we are heading to a deal perhaps next week, or if not in June of this year when the interim deal officially subsides. After June given the political environment in the US and likely developments in Iran, it will become considerably more difficult.
 
This deal will likely involve export of Iranian uranium hexaflouride gas to a third party, perhaps Russia, for conversion into fuel plates, which are difficult to turn back into nuclear weapons grade uranium. Other nuclear activities will be frozen and European and SWIFT sanctions removed, as well as oil export sanctions. US sanctions will remain, subject to a 2-3 year monitoring period, but US-Iranian trade is likely to remain minimal and the SWIFT sanction removal will allow Iran to trade actively once more. There will be a 10 year "sunset" provision at which point the deal will have to be renegotiated, but the Nuclear Non-proliferation Treaty will stay in place past that, along with the Additional Protocol of increased inspections Iran is likely to agree to.

*  *  *
 
The market impact of an Iranian nuclear deal would be most immediately anticipating the return of 1mbpd of Iranian exports that disappeared a few years ago to be priced back into the market, along with expectations of rising Iranian production given they can access the market for much needed infrastructure investment (Iran still imports gasoline!).
 
This is likely to put pressure on a fragile oil price and set the stage for a second bottom before the much higher levels of oil price we have predicted in the coming years (my two year target remains $130 spot Brent, JP is considerably more bearish), particularly as Cushing inventories fill to the max in the next few months thanks to the contango still in place as we noted in January when predicting a sharp spike following the ascension of King Salman before the oil price subsided once more.

*  *  *
 
This presents an interesting short-term play as the likelihood of a spike on no deal is minimal as the market is not expecting one as this point in time, but the downside risk could be substantial as classical data like inventory build continues to mount and we are still a few months away from meaningful shale production slowdown.
 
Oil stocks have disassociated from oil prices given the steep oil contango, but as consensus expectations continue to drop and US companies in particular are forced to revalue reserves due to accounting rollover next quarter at $50 versus $90/barrel, we should expect to see increased pressure on dividends, with majors like ENI perhaps the first to go, destroying a key support for these stocks.
 
Gulf stock markets are likely to be relatively unaffected, although we could see some move in Dubai property as capital is repatriated to Iran. The Iranian stock exchange is a massive beneficiary at 10x the size of Nigeria and once SWIFT sanctions are removed, there are paths to invest in this at mid-single digit PEs and dividends in the teens, offering huge potential upside..
 
The markets that will be hit are likely Russia, which is one of the top performers year to date but has a currency that is basically pegged to oil now and Nigeria, where crunch elections are coming at the end of March and the central bank has simply run out of resources to stabilize the currency, which I still see going to 240 or so. The new budget in Nigeria is meant to balance at $50-60, but the leakage in the system still remains immense. There is some danger of political fracas during the elections and even worse if they are delayed once more.

 

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Tue, 03/17/2015 - 08:10 | 5897485 stocktivity
stocktivity's picture

It's all Bullshit!!! None of this matters. It's all about one word in the Fed statement tomorrow. Stocks need their fix.

Tue, 03/17/2015 - 08:12 | 5897488 Haus-Targaryen
Haus-Targaryen's picture

Iran's move here in genious.  

"You do what we say, or we output MOAR thus driving down the prices even harder."  

I wonder what the conversation about this move is like between Moscow & Tehran?  

Tue, 03/17/2015 - 08:18 | 5897502 101 years and c...
101 years and counting's picture

i dont think you read this correctly.  Iran has no power here.  they have to cave to get the sanctions against their oil exports lifted.

Tue, 03/17/2015 - 08:25 | 5897523 cossack55
cossack55's picture

As oil drops, the price of S-300 and S-400 systems rise.  Push

Tue, 03/17/2015 - 08:42 | 5897561 Usurious
Usurious's picture

how long have these 'sanctions' been in place? Since the Iranian hostage situation?

Tue, 03/17/2015 - 09:21 | 5897702 CrazyCooter
CrazyCooter's picture

According to wiki, they went in three phases; the revolution, then between the gulf wars, then due to enrichment.

http://en.wikipedia.org/wiki/Sanctions_against_Iran

Realize that Saddam was selling oil outside the petro-dollar system, which is why they went after him (twice). If Saddam had stayed in the petro-dollar system, he would be running Iraq today.

Iran was doing the same thing, but invasion wasn't an option, so they stirred the political pot and did the SWIFT sanctions thing. Iran had pretty bad currency problems for a while, but it looks like they survived.

Also, I think the second largest oil field in the world is in Iran, and it wasn't discovered until the 80s. The big one in Saudi was discovered in the 40s, so that gives you an idea of how much oil is left to pump out.

They are probably just trying to get a big producer to stay in SWIFT at this point. Who knows what the fuck Obama is doing.

Regards,

Cooter

Tue, 03/17/2015 - 09:40 | 5897760 Usurious
Usurious's picture

so the sanctions kept the Iran oil OFF the market.......more profit for Saudi/EXXON/FRNote/bankster/MIC complex.........IOW, more theft of your labor (thanks Rockefellar/Rothschilds)........as oil prices have been in a fake bubble since the fake arab oil embargo and fake yom kipper war of the mid 70's

 

The wars against Iraq kept the Iraqi oil OFF the market..........fast forward to today and we will see Iranian oil for sale and a lower oil/gas price...........doesnt say much for the petrodollar/debt money system

Tue, 03/17/2015 - 11:15 | 5898174 Reference Variable
Reference Variable's picture

Mom pants wouldn't support the Zionists bombing them. I'm starting to think it's not just because he's feckless, but that the State Department decided it's the better play to have Iran strong, nuclear armed, and independent. With power shifting does the US need a nuclear Iran as an ally rather than a foe? Does Russia arming Iran indicate that US is aligning interests against China rather than against Russia?

Tue, 03/17/2015 - 08:18 | 5897503 GetZeeGold
Tue, 03/17/2015 - 08:15 | 5897492 orangegeek
orangegeek's picture

WTI oil weekly shows support near 33-35

 

http://bullandbearmash.com/chart/wti-oil-weekly-sharply-stronger-usd-con...

 

Historically, oil is priced between 10-30.

 

Obama's Petrobras/Soros deal (why Barry blocks keystone) must be on the ropes by now.

Tue, 03/17/2015 - 08:21 | 5897510 GetZeeGold
GetZeeGold's picture

 

 

Historically, oil is priced between 10-30.

 

That's when people use to have 40 hr/wk jobs.....not sure what the market can bare with 29.5 hr/wk jobs.

Tue, 03/17/2015 - 08:16 | 5897497 101 years and c...
101 years and counting's picture

eventually, the "markets" always win.  oil was held up by QE and lies for years.  and now, ridiculous economic fundamentals such as demand/supply are beginning to matter again.  stocks markets will have their crash too.  just like gold/silver and then oil.

Tue, 03/17/2015 - 08:22 | 5897512 holdbuysell
holdbuysell's picture

What happened to all those oil derivatives? I find it hard to believe that such an abrupt crash in oil price has not caused fall out among at least one seller of the derivatives.

Tue, 03/17/2015 - 08:25 | 5897520 GetZeeGold
GetZeeGold's picture

 

 

Around $100 a barrel wasn't it?

 

Shouldn't be long now....I'm practically giddy with excitement.

Tue, 03/17/2015 - 09:16 | 5897683 SheepDog-One
SheepDog-One's picture

Plus all of the funds all in betting on oil whiplash ing back up?

Tue, 03/17/2015 - 09:27 | 5897721 CrazyCooter
CrazyCooter's picture

Well, I think the options boil down to:

  1. The psychos running the joint are going to pile in LONG at this low prices and start a war or equivalent to send the price back to the moon, OR
  2. The global economy is taking a big shit and all hell is about to break loose because NIRP ain't gonna fix it this time around

Regards,

Cooter

Tue, 03/17/2015 - 08:23 | 5897515 disabledvet
disabledvet's picture

Volume sure dried up all of a sudden.

 

Sounds to me like Putin is about to take one to the back of the head.

Tue, 03/17/2015 - 08:29 | 5897534 Usurious
Usurious's picture

suck it BIBI..........

Tue, 03/17/2015 - 08:24 | 5897516 Quinvarius
Quinvarius's picture

I guess we will see what happens when this blow off top in the USD resolves itself.  It is just a piece of paper with an arbitrary value.  It is no different that the Euro.  And once again, the Euro haters are going to learn the hard way, it is just a trade with no fundamental substance.  Paper is paper.  Paper prices are set with almost zero market reality behind them.  Paper oil is the same.  Paper goes down because it went up.  It goes up because it was down.  There is no there there.

Tue, 03/17/2015 - 08:27 | 5897527 Dead Man Walking
Dead Man Walking's picture

Gas for our suv's will be cheap now.  With no job, I'll have to sell my suv to eat.

Tue, 03/17/2015 - 08:28 | 5897531 mygameon
mygameon's picture

Expanded the kitchen coop and rabbit hutch yesterday.

Need to stick to the plan and ignore all of the mental masterbation of "it is a rigged system we are fucked".

It was fun to host 5 millennials that were interested in the most powerful offensive against an oligarchal controlled government: LEARN HOW TO FEED YOURSELF!

California mega drought suggests this needs to be accelerated......

Tue, 03/17/2015 - 09:01 | 5897633 new game
new game's picture

plus 1000, self sufficiency!!!!!!!!!!!

fuck all this shit going on.

take care of business

busy doin nothin all day, ha...

Tue, 03/17/2015 - 08:46 | 5897577 fremannx
fremannx's picture

OIL should get a slight bounce or a sideways movement for a while, but the over-riding trend is still downward and there is a long way to go before the deflationary vortex is through consuming everything in its sight... including oil.

http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...

 

Tue, 03/17/2015 - 09:13 | 5897675 SheepDog-One
SheepDog-One's picture

'The markets likely to be hit are Russia'.....or so they hope. However Russia doesn't seem to give much of a shit unlike market-centric Westerm countries.

Tue, 03/17/2015 - 09:19 | 5897694 dalitis
dalitis's picture

The potential of Iran to increase its crude oil exports is dwarved by the potential decline in the US and Canadian oil patches, that will be unable to maintain production at anywhere near current prices. 

Tue, 03/17/2015 - 11:20 | 5898201 sudzee
sudzee's picture

Saudi Arabia is lookin for a few thousand good oilmen:

 

http://www.financialpost.com/m/wp/news/blog.html?b=business.financialpos...

Tue, 03/17/2015 - 11:34 | 5898256 Sages wife
Sages wife's picture

So, here's the deal. The united states of arabia and saudi america collude to bankrupt the many oil producing nations which refuse to bow to their royal hegemony. They agree to allow their domestic industries to suffer enormous loses to further consolidate their former stranglehold on the global oil market. They further agree that the united states of arabia will print revenues for their TBTF buddies in the industry, while allowing the smaller companies to perish. The BP's and Exxon's, etc. take extended vacations with bonuses and plan for the absorption of the assets of the formerly profitable small fishes, in turn reaping a healthy increase in market share through a consolidation of their own. Russia, Iran, Venezuela, Brazil, and others, scramble to hold their economies together but struggle mightily and become increasingly desperate. This, of course, leads to a coalition of nations which soon overcomes it's fear of,and obedience to the evil duo. And so, the major factor contributing to the current imperial status of these two rogue nations, the petrodollar, will unwittingly become the catalyst of their own demise. The mighty serpant consumes his own tail.

Tue, 03/17/2015 - 12:23 | 5898472 Financial Paparazzi
Financial Paparazzi's picture

LOW OIL PRICE MAY LEAD TO FRENCH FRIES BEING COOKED IN BRENT

Soy, corn and canola oils are all more expensive than Brent right now, poor families seasoning salads with gasoline.

Source: www.financialpaparazzi.com 

Tue, 03/17/2015 - 13:33 | 5898768 MeelionDollerBogus
MeelionDollerBogus's picture

So when do we start multi-party talks and inspection for nuclear weapons in Israel?

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