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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Iranian Crisis Could Send Oil To $100

Oil

Oil prices started the year on a high note as some geopolitical tension pushed aside bearish concerns. Both WTI and Brent opened above $60 per barrel for the first time in years.

The protests in Iran were the main driver of the bullish sentiment in the oil market. Anti-government demonstrations swept across the country in recent days, and unlike the widespread protests in 2009, the current rallies are related to economic woes and are also taking place in more cities than just Tehran. “Growing unrest in Iran set the table for a bullish start to 2018,” the Schork Report said in a note to clients on January 2.

At least 14 people have been killed in the protests and an estimated 450 have been arrested. It is the most serious challenge to the Iranian government in years, and Iran’s Supreme Leader put the blame on foreign agents, presumably the United States. “In recent days, enemies of Iran used different tools including cash, weapons, politics and intelligence apparatus to create troubles for the Islamic Republic,” Ayatollah Ali Khamenei said.

Meanwhile, tension over North Korea – although not a new development – could be spreading to include a spat between the U.S. and Russia as well as the U.S. and China. Reuters reported late last week that Russian oil tankers have sent fuel to North Korea on multiple occasions in the last few months by transferring cargoes at sea. If true, the actions would amount to a violation of UN sanctions. Sources told Reuters that there is no evidence that the Russian state was involved, but the news has raised the specter of U.S.-Russian tension as Washington seeks a hard line on Pyongyang. Related: Oil Sees Strongest Start Of Year Since 2014

The spat over oil shipments to North Korea is also centered on China. South Korea seized two ships that were allegedly carrying oil to North Korea. The U.S. has been trying to get the UN Security Council to blacklist a number of ships suspected of sending oil to North Korea, but China has resisted such efforts. The incident has raised suspicion in Washington that China is circumventing UN sanctions and providing a lifeline to North Korea.

The two geopolitical flashpoints seemed to outweigh bearish concerns over the return of the 450,000-bpd Forties pipeline to operation. The key North Sea conduit came online in recent days, restoring disrupted North Sea oil to the market. Libya also repaired an oil pipeline that funnels crude to its Es Sider export terminal, easing concerns about disrupted supply. The expected return of supply from both countries has been cited by analysts as reasons to expect a selloff in crude prices at the start of the year, but so far, the tensions in Iran and North Korea have carried the day.

With that said, the odds of a tangible disruption from these geopolitical events is minimal. “I don’t think we’re seeing much immediate risk from these [Iran] protests which are taking place in urban areas but I think it’s the backdrop—both political and in the oil market—that mean these are catching attention,” said Richard Mallinson, analyst at consultancy Energy Aspects, according to the WSJ. “Geopolitics is going to be much more in focus now that we’re in a tighter market.” Related: U.S. Shale Can’t Offset Record-Low Oil Discoveries

But Iran’s oil fields are located far away from any serious impact from the demonstrations. “As of yet there is no deep seated concern for a disruption of Iran’s 3.8 mb/d crude oil production,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a statement. “However, if it was to happen it would have a huge impact on the global crude oil prices. A full disruption of such a magnitude would immediately drive the Brent crude oil price above the $100/bl mark.”

As concerns of a supply disruption from Iran start to wane, as seems likely, the focus will shift back to the fundamentals. The IEA, among others, predict a return to inventory builds in the first and possibly second quarter of this year. Also, investors have racked up an extremely lopsided bet on crude futures, and such levels of bullishness tend to precede a selloff. That means that as these geopolitical events lose salience, the short run risk for oil prices is very much on the downside.

“Not having at least one solid correction to the downside in 2018 with such a mega bullish allocation to start with would probably be the biggest surprise of all this year,” Schieldrop added.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • John Brown on January 02 2018 said:
    Any reason no matter how silly to push up the price of a barrel of oil regardless of the glut in supply, and the millions of barrels that have been idled by OPEC and RUSSA to try and bring down the Global Glut. First of all there was nearly half a million barrels of oil a day coming back online with the two pipelines being repaired, and there's almost no way all of Iran's production could be taken out of service, and even if the demonstrators could force the corrupt, evil Mullah's regime out of power any new Government would have restoration of production and sales as their #1 priority, so any outage would be short term, and there's plenty of oil in our strategic reserves, not that it would be needed if OPEC and Russia should brought some idle capacity back into production.
    Years ago the idea of losing over 3 million barrels of production a day alone could have sent a barrel of oil to $200, but now even this article suggest actually losing that much production could send it to $100. That's because everyone knows there is a glut, millions of barrels of idle production sitting their available, and $100 a barrel oil would set the U.S. oil industry on fire, and production would soar, and its very doubtful even under the worst circumstances that all of Iranian production would stay offline more than a weeks, or a month so, and could easily be filled just from strategic reserves while it is offline.
  • Gary Novak on January 02 2018 said:
    "As concerns of a supply disruption from Iran start to wane, as seems likely, the focus will shift back to the fundamentals" so that " the short run risk for oil prices is very much on the downside." Shouldn't the headline be "Iranian Crisis Won't Send Oil to $100"? By the way, why does it seem likely that concerns of a supply disruption will start to wane? Unlike Obama, Trump is encouraging the protesters. It seems likely to me that the protests will intensify.
  • Douglas Houck on January 03 2018 said:
    Nothing going to happen with these demonstrations, much less anything to do with Iran's oil/gas output.
  • Michael Frank on January 04 2018 said:
    If the oil price goes up it will be a strong motivation for investments in fuel efficiency. It is actually huge amount to save on that account for countries like China, India, Indonesia, and Egypt.
    https://www.linkedin.com/pulse/india-china-hold-key-permanent-low-oil-price-michael-frank

    If consumers will see increased gas prices they will have one more reason to change to a non-fossil vehicle.
    https://www.linkedin.com/pulse/electric-vehicles-past-162-years-time-ahead-michael-frank

    Heating oil consumer will have more reason to change to biofuels as wood pellet and gas-fired power plants would migrate to biogas.
    https://www.linkedin.com/pulse/waste-low-quality-biomass-new-super-fuel-asia-michael-frank

    The above will reduce demand for oil. But should the price increase it will also be a motivation for producers to pump more and to bring more rigs online - that will increase the supply and drive the price down.

    The oil price could take a little hike but it wouldn't be for long. It is just too many parameters working against oil (and fossil fuel in general) nowadays.
  • EJ on January 04 2018 said:
    We have hundreds of years of oil reserves at our present rate of consumption in the Bakkan (?) reserve under Dakota/Montana and on Gull Island, Alaska. So where is the shortage except in greedy petro-chemical minds?

    Oil is abiotc, not “fossil fuel” as has been sold to the public. It replentishes itself.
  • Liars Everywhere In Oil on January 04 2018 said:
    I thought IRAN was sanctioned to the balls?
    Why would OUR OIL go to $100 a barrel....sounds like bullhit to me.
    Liars figure and figures lie!

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