It was a good day for oil prices today with WTI up $2.32 to $70.53 and Brent up $1.57 to $76.21 as there were a number of positives including the follow thru of Syncrude being down, surprisingly big API oil inventory withdraws, and the US State Dept senior official background (but public) conference call on the US objectives and efforts to convince allies to be tough on Iran in line with the US sanctions. As good as oil prices were today, the reality is that they could have been way more than $10 higher if the markets believed the US will be successful in convincing its allies/other countries to comply with its now clearly stated objectives to cut Iran’s oil exports to zero. Think about it, Iran exported 2.4 mmb/d of oil and 0.3 mmb/d of condensate in May. If markets believe the US can be successful, even Saudi Aramco can’t replace this much (API and crude quality differences aside) with its spare capacity. And lets not forget that we still have Venezuela declines that we believe will be faster than expected. Even if we assume the move up in oil prices today was all due to the US state dept senior official comments, at most this probably prices in a reduction in Iran’s oil exports by 500,000 b/d or perhaps a little more. We don’t believe it prices in a 1 mmb/d reduction in Iran’s oil exports (ie. back to prior sanctions levels). And certainly no where near a full stop to Iran’s oil exports. Its why we say that if the market believed the US can be successful in this stated objective, WTI would have been way higher than $10 higher today. We expect oil to go higher as markets price in the expectation for Iran oil exports to be hit by 1 or 1.5 mmb/d even with the return of 1.0 mmb/d of OPEC/non-OPEC supply.
There is no question that an OPEC deal or no deal is the driving force for oil prices over the coming days. WTI has moved up off the bottom today but is trading down ~$0.50 to $64.85 as of 8am MDT on the reports out of Vienna that the mood is changing and that there is momentum for a mid point type deal to be reached to increase OPEC/non-OPEC oil supply in H2/18. Prior to yesterday, the “NO” side (Iran, Iraq and Venezuela) had markets fearing no deal. But the momentum shifted yesterday with the softening of the Iran stance that countries should be able to produce to quota and then Iraq trying to mediate to find a mid point. This morning, that opening evolved into an expectation that there will be a supply increase and that the number for OPEC debate is 1 mmb/d ie. some sort of mid point. There doesn’t seem to be the momentum for 1.5 mm b/d or a return to Oct 2016 levels, or chatter, as of yet, to a potential Sept review with an underlying expectation of a further oil supply increase. But as we look to the coming months, we believe the fundamentals are going to push WTI back above $70 and pointing higher no matter how much OPEC increases oil supply this weekend. The normal seasonal demand increase in oil should accommodate a return of OPEC barrels. Plus there is the likelihood that effective supply adds will be less than an announced deal if the supply increases are shared in proportion to the original cuts. And then we have the wildcards of Venezuela and Iran which could push WTI well above $70. Continue reading “WTI Should Be Going Back Above $70 No Matter How Much OPEC Increases Oil Supply This Weekend”