Oil Market Caps Gains And Losses

The fear factor over possible supply disruptions stemming from escalating tensions in the Middle East put upward pressure on prices this week as word surfaced that Iran had seized an 'oil tanker' sailing near its waters, then fell when Washington showed signs of loosening its grip over Iran sanctions when it named dovish Rand Paul to liaison with Iran for a possible resolution. 

And just to ensure that tensions remained balanced, Trump said the US 'shot down' an Iranian drone on Thursday. But speculators will remain guessing with a multitude of reports contradicting this. They range from the US having jammed a drone, rather than shooting it down, causing it to be destroyed, to Iran denying the loss of a drone at all and then saying it might have shot down its own drone by mistake.  

But there is less ambiguity when it comes to oil fundamentals. The market is capping both gains and losses as it grows increasingly numb to the unrest that is now practically commonplace. What persists is the perception of a global crude oil glut. 

In the US, both crude oil and gasoline inventories are 4% and 2% above the five-year average for this time of year, and crude production in the US is on an upward trend, at 12.3 million bpd, just 100,000 bpd under the all-time high.

Are You Ready for a New Oil Benchmark?

The next new oil benchmark along the lines of Brent and WTI may very well be Murban, courtesy of the UAE. The timing is perfect: With the fear factor higher than ever for global shipping lanes that lead to the Strait of Hormuz, a UAE benchmark could offer a shipping and storage diversion. And it could happen as soon as this year, if approved at the highest levels. 

This is how the conflict with Iran sparks greater change, and it goes beyond short-term fears and extends into market share. Of course, it's wider market changes that are really prompting a transformation, but the conflict with Iran is what will help pick up the momentum. 

The UAE produces some 3 billion barrels of oil per day, making it the third largest producer in the region behind the Saudis and Iraq. But it only sells its oil directly to end-users, who are typically Asian. The plan is to launch a full-scale in-house trading operation as well and expand its horizons. 

The UAE has always kept tight control over its oil, and it wasn't until 2014 that it sold its first-ever supply of Murban crude (its main onshore grade) to a group of Western oil companies without knowing its destination. That was the first time Murban was available for trade in the spot market, which offers sellers a chance to raise a premium. 

But since then, there have been no major reforms, and no talk of a major overhaul until now. What it means, essentially, is that the UAE will try to turn Murban into a benchmark and start selling it freely, without destination limitations, to any client--turning the entire operation into free market trading as it experimented with in 2014.

The UAE needs new markets, and it needs the premium it could capture by selling its oil on the free market. 

Giant Maersk's Carbon Emissions Gamble

Maersk is risking billions in hopes of developing new technologies that will allow it to ship everything globally with zero carbon emissions by 2050. It's a longshot that if unsuccessful, will price Maersk right out of the market; recouping those billions means higher shipping costs that will inevitably need to be passed on to consumers. But if successful, the world's largest shipping company may set the pace of this pricey zero-carbon initiative that will force its competitors to do the same. 

Yes, giant companies are finally starting to pay the climate change piper; this is a new trend. But are consumers--and shareholders--really prepared to take the brunt of it? And is this even going too far for activist shareholders?

Maersk has already been putting its money where its mouth this; this isn't another PR campaign. It's spent some $1 billion already on cutting emissions so far. Getting much further means spending much more than that on new technologies because a zero carbon emissions goal by 2050 isn't feasible with today's tech fare. Still, Maersk insists it will be economically viable in the end. And their first task is to lobby their own customers. 

In the meantime, they're counting on new technology to reduce the cost of clean energy. What's happened with the costs of solar and wind will eventually happen with shipping--or so the theory goes. But the shipping giant is also banking on governments worldwide stepping in to mandate zero, or near-zero emissions, and if Maersk is already playing this game it sees itself not only competitive, but way ahead of the competition.