Oil macro analysis, page-500

Oil prices ease back, but the uptrend remains in place

Oil prices lost traction early Thursday on profit-taking after a sharp rise overnight, driven by the unexpected drop in U.S. crude stockpiles and continuing supply outages in Canada and Africa.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in June CLM6, +0.22% traded at $46.18 a barrel, down $0.02 in the Globex electronic session. July Brent crude LCON6, +0.19% on London’s ICE Futures exchange fell $0.05 to $47.55 a barrel.
U.S. crude-oil stockpiles upstaged analysts’ expectation by dropping 3.4 million barrels in the week ended May 6, data from Energy Information Administration showed. While inventories still remain near the highest levels in more than 80 years, investors are taking comfort in the steady decline in U.S. production. EIA data show U.S. crude output fell last week to the lowest level since September 2014 to 8.8 million barrels a day.
Prices were also supported by ongoing supply outages in Canada due to wildfires in the country’s oil-sands hub, as well in Nigeria, where militant attacks on oil facilities have squeezed crude exports.
Shell Petroleum Development Co. of Nigeria this week shut off exports from a major pipeline due to a leak. This is in addition to an offshore production platform and an export terminal in Nigeria that have also been shut this year. Nigeria produced about 1.7 million barrels a day of crude oil in March, the lowest level since 2009, according to the International Energy Agency.
Political upheaval in Libya has also hindered production there. The country’s oil production fell by 140,000 barrels a day to 220,000 barrels a day following the blockage of a port last week, said a spokesman for the internationally recognized National Oil Co. in Tripoli.
“Prices have broken the resistance and will need further outages to push prices higher,” said Stuart Ive, a client manager at OM Financial.
Market watchers say that while moving sideways on a daily basis, oil prices will likely enjoy a modest uptrend in the near term, but warn of strong headwinds ahead.
U.S. shale producers that were sidelined earlier by the sub-$30 prices might jump back into the game when prices climb higher to make up for lost time, said Aaron Lynch, a Sydney-based energy analyst at OptionsXpress.
The resurgence of U.S. producers will likely prompt other producers — especially those in the Organization of the Petroleum Exporting Organization — to keep pumping at top speed, further exacerbating the global glut and wiping out any likelihood of a collective output cap at the next OPEC meeting in June.
“It will be an every-man for himself situation all over again,” said Lynch.


Crude Oil

$46.34 Change +0.11 +0.24%

May 12, 2016 3:43 a.m.
Previous close $ 46.23
Day low $45.78
Day high $46.44

Iranian oil exports have soared

Iran is believed to have dipped into it's floating storage to boost exports after the sanctions were lifted in January
Iran has been back in the international oil markets for only four months, but it’s already shaping up to be the biggest risk to the oil price this year, says one prominent strategist.
Since sanctions were lifted on the Middle Eastern country in January, Iran has been able to boost exports, wasting little time to ramp up its production. In April, Iranian exports rose by 700,000 barrels a day from pre-sanctions levels, exceeding expectations, according to Helima Croft, chief commodity strategist at RBC Capital Markets.
“Iran came back much faster than expected,” she said. “And if it’s bigger and stronger consistently, to me that’s the most bearish supply story.”

Croft said assessing how many barrels of its 700,000 are from new production, would help to determine the degree by which Iran could flood an already oversupplied market.
She estimated that around 200,000 barrels come from floating storage, which means Iran would struggle to sustain the 700,000-barrels-a-day production increase in a couple of months.
“But if they can push consistently beyond the 500,000 print with like 700,000-800,000 in new incremental production that’s out of our base case,” she said.
The managing director of the National Iranian Oil Co., Rokneddin Javadi, in February said his country was aiming to boost daily oil production to 4.7 million barrels, which would require an increase of 700,000 barrels a day.

If Iran succeeds with reaching and sustaining production at those levels, it could upset the balance of the entire oil market, according to Croft.
RBC expects the market to stabilize in the fourth quarter of the year, but that a ramp up in Iran production could push that balancing point to 2017. Generally, oil analysts—including the International Energy Agency—are optimistic that oil supply from outside the members of the Organization of the Petroleum Exporting Countries will fall this year, while demand is set to gradually pick up. Combined that should mark a turnaround for oil prices in the second half, RBC said.
Crude CLM6, +0.13% and Brent LCON6, +0.06% oil have surged more than 70% since mid-February, hitting 12-year lows of around $26 and $27 a barrel. This has in part happened because of anticipation the market will rebalance and because of a spate of supply outages around the globe, due to political unrest in Libya, a series of attacks on Nigerian oil facilities and raging wildfires in Alberta, Canada.
Such issues, however, are unlikely, to hit Iranian production, according to Croft.
“If you ask what’s the likely bear story for the oil market, it’s Iran, because it’s more a question of geology and below-ground issues,” she said.
She cautioned, however, that exactly because of the geological challenges, Iran could struggle to push production significantly higher.
“You can’t teach old fields new tricks and two third of the fields are over 70 years old so you need new investment,” she said. “We think they are maxed out now. The fact that the Iranians are saying they are willing to cooperate now with OPEC, I think is probably a realization they are at a max.”

MarketWatch May 12, 2016