The oil market was the first to feel the impact of the Great Unwinding of policymaker stimulus nearly a year ago. It had completely lost its key role of price discovery due to the liquidity being supplied by the central banks. This had overwhelmed the fundamentals of supply/demand. And we are still living with the consequences today.
Many traders have only ever known a world where central banks aim to dominate the financial markets – and so they jumped on the recent technical rally in the belief that somehow markets would repeat the 2009 rally.
What it is about the world “massively oversupplied” that these traders find so difficult to understand, you might ask?
This, after all, was the phrase used by the International Energy Agency (IEA) last Friday to describe the current state of oil markets. And yet prices actually ended higher on the day, even though the IEA’s monthly report was crystal clear on the outlook:
“It remains that the oil market was massively oversupplied in 2Q15, and remains so today. It is equally clear that the market’s ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day. Something has to give.”
Now a further test of oil markets is underway, with today’s historic agreement between Iran and the major global powers on the nuclear issue. As The Guardian reports:
“In terms of Iran’s ability to sell crude, I think that is where we will see the most immediate loosening up of restrictions. Iran has between 40 and 50 million barrels of crude at sea. Expect this crude to come to the market in short order. They will start competing fiercely to regain market share that they have lost to their Persian Gulf neighbors. Unfortunately for Iran the timing couldn’t be worse. Oil prices are depressed and already there is a glut of oil on the market. Adding Iran’s crude will put further downward pressure on oil prices.”
The Guardian thus confirms that Iran already has around 40mb of oil in floating storage, as I noted 2 weeks ago. It will not be long before this oil starts finding its way to market, even if sanctions are still officially in place. And this volume will be appearing as we move into the seasonally weaker Q3 period for demand. Plus the IEA forecasts that Iran could increase production by up to 800kb/day within a few months of sanctions being lifted.
I have forecast for some time that oil prices would return to their historical $30/bbl or lower level, I see no reason to change my mind today.