The lifting of the US export ban has led to early announcements of oil sales: Vitol will move the first cargo via the Enterprise terminal in Houston in early January. Iran is expecting to have sanctions lifted around the same time, and is already ramping up production. While the Libyan peace deal implies its volumes should increase again.
Consensus wisdom has failed us, yet again, on these key issues:
- Commentators assured their clients that the US was unlikely to export much, if any, oil if the export ban was lifted. But this defied common sense. Why would the industry spend so much time and effort to achieve the lifting of the ban, if not to use it? And why would the Republican Party make this a centre-piece of policy, just before a Presidential election year, if it was not going to have any impact?
- Similarly we were told that it would take months for Iran to increase its volumes. The same self-appointed “experts” assured us that Iran’s facilities were in a state of near collapse, and so it would be technically impossible for major new exports to begin for months, if not years
This highlights how the waves of central bank created liquidity have destroyed the role of real analysis. Research reports used to be short and concise, and focused on improving their clients’ understanding of critical issues; today, they can be hundreds of pages long, but are instead devoted to measuring alternative performance between companies, sectors and asset classes.
No wonder many people feel confused and uncertain as to what they should believe.
My suggestion is that logic and common sense are usually a good guide to future developments. This has certainly been true of oil markets since the Great Unwinding began in August 2014:
- Logic says the record volume of US inventory will move fairly quickly into world markets. It costs money to store it, whereas a sale will put money in the bank. And the alternative, of waiting for prices to rise, has proved a failed strategy during 2015. Not many Boards, or their bankers, are likely to continue this strategy in 2016
- Similarly Iran is keen to boost its presence on the world stage, and to challenge the leadership of the Gulf States. President Rouhani also needs to show the electorate that he has delivered on a key promise. And Iran has been in the oil business for a very long time, and has kept some oil sales during the embargo
The question of course is where all this new oil will go? Q1 is normally a period of strong demand from a seasonal viewpoint, so that should help. But pricing will be a different issue. US and Iranian crude will essentially be competing in the Asian market. And this is still slowing as China prepares for a difficult 2016.
President Xi has signalled that he intends to “take the pain of restructuring” next year, with major supply side reforms including capacity closures. This makes perfect sense for him, as it means he will then be able to approach reappointment in 2017 with the argument that “the worst is now behind us”. But it means China’s economy will slow further, putting even greater pressure on commodity exporters and pricing.
Thus the chart above from Bloomberg highlights the key issue. S Korea is Asia’s 4th largest oil consumer, and so a key target for all this new oil. As its Ministry of Trade, Industry and Energy has noted:
“U.S. West Texas Intermediate oil must drop $4 to $6 below Dubai crude, the benchmark for Middle East supply. American cargoes must also become cheaper relative to Brent, the marker for shipments from regions including Africa, for them to be viable.“