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Robert Rapier

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Oil Prices May Have Reached A Bottom

Last Friday, oil prices fell for the 10th consecutive day. According to CNBC, this marked the longest losing streak for crude oil in 34 years.

I have covered the factors behind this drop in the previous two articles. To recap, the loss of China as an export market for U.S. oil producers has caused crude inventories in the U.S. to swell, and the Trump Administration’s weakening of imminent sanctions on Iran have both been large factors in the decline.

Matt Badiali, senior research analyst at Banyan Hill, thinks the decline is now overdone. Matt says that from April to September, Iran cut 830,000 bbl/day of exports. But Saudi Arabia and the U.S. expanded production by more than that, so the world didn’t feel the pinch. As Matt explained to me:

My research showed that, during the run-up to Iran sanctions, many of the Asian countries cut back on Iranian oil imports. China included. Those countries cut about 900,000 bbl/day of Iranian exports. That demand didn’t go away, it was filled by the U.S. and Saudi Arabia. Then the U.S. government issued waivers to most of Iran’s oil trading partners. Now that those same countries got waivers, they are buying Iranian crude again…leaving a glut of oil on the market. I agree that the demand hasn’t declined. Supply, particularly from the U.S. is up.

That said, I am very skeptical that the Saudi’s can maintain this level of production. It’s only about 130,000 bbl/day below their highest production in the last decade, and they only maintained that level of output for a few months before cutting back. I believe that the market still has a drop in demand priced in. That seems wrong. I believe this will be the low oil price for the next 12 to 18 months.”

Michael Bertuccio, President & CEO of HB2 Energy, also noted that refinery maintenance may be contributing to the perception of an oversupplied market:

I believe there may be more immediate and shorter-term drivers to oil prices falling – particularly the West Texas Intermediate (WTI) cash market in Cushing, Oklahoma. This is refinery maintenance season. Of the ~14 million barrels per day (MMB/D) of refining capacity in PADD 2 & 3, ~6 percent has been offline.

Related: The Biggest Threat To Dollar Dominance

It is far more transparent in the physical oil basis markets where we have seen Midland trading $15 plus per barrel under WTI. However, Houston Ship Channel (MEH) is trading closer to Brent, which is currently plus $10/ barrel over WTI. Add a stronger and strengthening U.S. dollar to the equation and I see this as nothing more than a short-term price correction.”

Michael agrees that global demand remains strong—including Chinese demand. He believes exports will accelerate with upcoming pipeline infrastructure and the wide basis spreads will compress towards Brent, which is a better benchmark of global oil values.

One thing is for certain. Oil prices are on sale relative to where they were a month ago. It appears unlikely to me that a continued decline is supported by fundamentals, especially if the U.S. stops granting waivers on Iranian oil imports in six months — as is the stated intent.

By Robert Rapier

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  • Mamdouh G Salameh on November 18 2018 said:
    This article is full of inaccuracies and lack of hard evidence to support claims made by the author and those whom he quoted in his article.

    Let me first rebut the claims and then proceed to give the real reasons behind the recent slump in oil prices.

    Not only he is wrong to claim that the real reasons behind the slump in prices are loss of US oil exports to China causing US oil inventories to swell and the issuing of sanction waivers to eight countries but such claims demonstrate a lack of understanding of the global oil market and also wishful thinking. US oil exports to China amounting to an estimated 300,000 barrels a day (b/d) hardly register on the radar of the global oil market to cause a swell in US inventories. Moreover, the eight recipients of the waivers have neither increased nor decreased their purchases of Iranian crude as a result of the waivers.

    Another inaccuracy if not a plain untruth is the claim by Matt Badiali that Iran lost 830,000 b/d from April to September. Where is the evidence? If Mr Badiali doesn’t support his claims by hard facts, then they remain unsubstantiated claims if not plain untruths. Iran’s oil exports haven’t declined by even a single barrel of oil.

    Moreover, if Mr Badiali says that his research showed that, during the run-up to Iran sanctions, many of the Asian countries cut back on Iranian oil imports (China included), then his research is based on faulty assumptions. China and India which account for 68% of Iranian crude oil imports have been increasing their imports. It is possible, however, that South Korea and Japan which account for only 5% (or 110,000 b/d) of Iranian crude exports may have cut their imports a little.

    Now let me explain to you the real reasons behind the recent slump in oil prices. The first reason is the realization by the global oil market that US sanctions have so far failed to cost Iranian oil exports a loss of even one barrel. That is despite the fact that the global oil market has been bombarded for months prior to the sanctions by projections that the sanctions will cost Iran’s oil exports some 500,000 b/d to 1.5 million barrels a day (mbd). Furthermore, the issuing of sanction waivers to eight countries who didn’t need them in the first place and who would have continued to buy Iranian crude with or without waivers is the clearest admission by the Trump administration that their zero option is out of reach and that sanctions are doomed to fail.

    Another reason for the slump is that the global oil market has not re-balanced completely and that there is still a small pocket of glut capable of taking care of outages in Venezuela and elsewhere. That is why Saudi Arabia’s and Russia’s decision to add 650,000 b/d six weeks ago to keep prices down was a major mistake. It has just added to the glut.

    You should know by now that oil prices are volatile by definition because they come under various economic and geopolitical pressures virtually on daily basis. That is why one shouldn’t be surprised to see oil prices shuttling between bull and bear markets all the time.

    In October the oil price hit $87 a barrel. Today it is $67. Tomorrow the markets could change from bearish to bullish sending prices up to $80 particularly since the robust fundamentals of the global oil market haven’t changed since October when the oil price hit $87.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • EHLipton on November 30 2018 said:
    Sure alot of, " I believes" in this article. Now to our sponsors,,, while I believe you believe,, more in a minute, after this break. folk's,,, umm,,, now back to the show already in progress!
    I believe your belief mechanism needs an over haul or a major tune up. Back in a Momento por-favor,, Friends, do you or a loved one have chronic cracked heals, stinky feet perhaps? If so,, call this firm immediately,, you or a loved one could be entitled to a substantial large cash settl,,,, blah blah ughh!
  • EHLipton on November 30 2018 said:
    Mr.Salami,, I could not agree 100%, but I do agree it is over supplied by those speculating the bigger dollars. The times, like everything, are changing. Demand is; if not dropping, leveled out world wide. It is said that as few as 2% have the majority of all the wealth in the world,, they don't mind or notice cost of a gallon of fuel,, the other 98% do.

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