Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.

Portfolio

Loading...
Select Portfolio and Asset Combination for Display on Market Band
Select Portfolio
Select Asset Class
Show More
Download ET MARKETS APP

Get ET Markets in your own language

DOWNLOAD THE APP NOW

+91

CHOOSE LANGUAGE

ENG

  • ENG - English
  • HIN - हिन्दी
  • GUJ - ગુજરાતી
  • MAR - मराठी
  • BEN - বাংলা
  • KAN - ಕನ್ನಡ
  • ORI - ଓଡିଆ
  • TEL - తెలుగు
  • TAM - தமிழ்
Drag according to your convenience
ET NOW RADIO
ET NOW
TIMES NOW

Iran’s response to US sanctions likely to guide crude oil market

ET CONTRIBUTORS|
Updated: Sep 12, 2018, 09.13 PM IST
0Comments
Crude-oil-rEUTERS'
It is important to keep an eye on the bearish flashpoints hanging over market in September.

Commodity Summary
MCX

CRUDEOIL
By Navneet Damani

WTI and brent oil traded firm, but gains were capped amid concerns for future demand. Since mid-August, crude oil has been driven higher by worries about a supply shortage and weakening US dollar.

Last week, prices were driven lower by too much supply and worries over global demand. A stronger dollar and weaker US equity markets also weighed on prices.

US energy companies cut two oil rigs last week, bringing the total count to 860. The US rig count has stagnated since May, after staging a recovery since 2016, which followed steep slump previous year amid plummeting crude prices. The early weakness suggests investors have shifted their focus away from supply concerns, which drove up prices last week, to demand concerns. One issue bothering bullish traders is the risk of declining Chinese demand for oil.

Oil prices jumped midweek as traders took precautions ahead of potential supply disruptions due to a hurricane forecast for the upper US Gulf Coast. Hurricane Gordon led to precautionary closure of rigs around the Gulf of Mexico.

With uncertainty around the probable impact on supply from the region, crude oil prices saw substantial uptick in the last few trading sessions, with Brent crossing the $79 per barrel mark. September is notoriously popular for hurricanes in the US and threat of the same continues. After this, winters, which sees a surge in demand, would kick in, thereby providing support to crude prices.

Two Gulf of Mexico oil platforms were evacuated in preparation for Tropical Storm Gordon. The storm was expected to become a hurricane before it makes landfall as a Category 1 hurricane near the Mississippi-Alabama border. Prices moved lower later in session due to technically overbought conditions. The speculative buyers were way ahead of the actual event and that the direction of the storm is still unknown as well as what infrastructure, if any, will be impacted. Also putting pressure on crude oil was a report from Genscape that said Cushing, Oklahoma, crude inventories rose nearly 754,000 barrels from August 24 to August 31.

Iran is now pushing European partners to provide written guarantees for upcoming demand as per the agreement. Iran's oil exports to the EU have declined by nearly half in the past 18 months. Iranian oil exports to the EU dropped to 387,000 bpd in Aug, from nearly 740,000 bpd in March, 2017. Amid all this, Iranian oil production has seen a sharp dip going below the 1 million bpd mark in August from the 2.3 million bpd a month before.

Iranian production is arguably single most important catalyst for oil prices, but with fear of collapsing output so high, markets may be overestimating just how bullish sanctions on Iran will be. Iran is also likely to use any means at its disposal, as it did during the last sanctions, to ensure it is able to export its oil. The fact that these sanctions are largely unilateral means that Tehran is likely to have more luck this time with undermining US efforts.

For Iran, India imported about 523,000 bpd of oil from Iran in August down 32% on a month earlier, as the United States steps up pressure on buyers to halt Iranian energy imports from November. Meanwhile, Europe is looking to open bank accounts in Europe for Iran to deposit oil revenues and secure Iranian oil exports. Europe is expected to be one of the regions to which Iranian oil sales could considerably drop due to Western shipping companies, insurers, and refiners backing out of purchases from Iran over concerns that they could run afoul with the US Administration.

Traders are expressing caution due to concerns over Chinese demand and the impact of the US – China trade dispute. China's crude oil imports rose 6.5% in August from a month earlier to their highest since May, boosted by a rebound in demand from smaller, independent refiners. To add to the worries, Donald Trump administration is preparing grounds for an all-out trade war with China by slapping unilateral crowbar tariffs on more than $500 billion of Chinese US President Donald Trump signalled his intention to impose tariffs on additional $267 billion, in addition to the proposed 25% duty to be levied on $200 billion of Chinese goods.

Iraq is pumping crude at record levels unaffected by the protests that engulfed the oil-rich south have not affected energy facilities in OPEC’s No. 2 producer. Iraq is producing crude at a level of about 4.36 million barrels a day, as agreed with limits set by OPEC, and has a capacity to pump about 4.75 million barrels. Meanwhile, the concerns of over rising supply from OPEC and U.S. influenced prices for the whole week. Output from OPEC rose by 220,000 bpd between July and Aug, to a 2018-high of 32.79 million bpd. The rise in output was fuelled by a recovery in Libyan production and strong Iraqi exports.

US EIA reported that US commercial crude oil inventories fell by 4.3 million barrels to 401.49 million barrels, the lowest since February 2015 which was bullish for crude oil prices but the huge increase in Gasoline and Distillate stocks kept pressure on crude oil prices. US crude oil production last week remained at a record 11 million bpd.

Overall, prices have been bolstered in recent weeks and are likely to remain supported amid signs that Iranian crude exports are declining at a faster rate than expected, in the run up to November when US sanctions on the country’s oil industry take effect.

Further, the proposed release of SPR by Trump in October and decision by OPEC to increase production will play with the sentiment in the months to come. The response from Iran will now determine the future course of oil prices. In the meantime, the escalation of the US-China trade war is certainly going to weigh on prices this month. While investors are currently enjoying the bullish wave in oil markets, it is important to keep an eye on the bearish flashpoints hanging over markets this September. Prices are likely to continue to be range bound until the start of the Iran sanctions on November 1, as market is still trying to find a balance point on the charts to satisfy both bullish and bearish traders.

(Navneet Damani is AVP Commodity research at MOFSL)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
0Comments

Also Read

Crude oil surplus vanishes ahead of Iran deadline

Commodity outlook: Crude oil may trade sideways

'Polls, crude oil, trade war key triggers ahead'

Decade of turmoil: Why Opec is not happy with crude oil at $80 a barrel

Need to propel biofuel production to curb crude oil imports: Gadkari

Comments
Add Your Comments
Commenting feature is disabled in your country/region.

Loading
Please wait...