Wed Apr 08 2015
Live Index (1454 articles)

What an Iran Nuclear Deal Could Mean for Oil

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Last week, the energy markets kept their eyes glued to Iran’s nuclear talks.

Finally, last Thursday, negotiators put a deal framework in place.

The U.S. stock market ended the day higher after the news came out. But Brent crude, the international benchmark, skidded lower.

Now, Iran has until June 30 to iron out the details with the P5+1 (the U.S., China, France, Russia, the U.K. and Germany).

Although a deal is starting to look likely, there are still many unanswered questions:

•  When would sanctions be lifted?

•  How quickly can Iran ramp up oil production?

•  What happens if a final deal isn’t made?

Consider that Iran may be able to start selling its oil on the world markets by early next year.

My colleague James DiGeorgia has been calling for West Texas Intermediate crude prices to soar to $ 65-$ 70 by year-end. But could an Iran deal throw a wrench in the works for energy investors?

Here’s what the oil markets are telling us …

Buyers Return to Brent

Brent crude reflects global oil conditions and prices better than our domestic benchmark, West Texas Intermediate.

On the charts, Brent shows more strength than WTI. That’s because global oil does not have the same logistical and storage issues we see domestically.

On top of that, there is more supply-destruction risk for Brent, so it needs a risk premium.

The trading action in Brent is much-smaller and less-active than WTI.

WTI trading volume runs at about 400,000 contracts, with the open interest at close to 500,000 contracts.

In the chart above, we can see that Brent’s trading volume is only about 12,742 contracts. Open interest is a mere 14,834 contracts.

The numbers may be smaller, but the trading action is significant.

In December, we mostly saw selling volume. Now, we are seeing strong buying volume.

Oil: Nowhere to Go but Up?

Brent likely made a low in early January. It had a normal one-day reversal (that is, it made a new low made during the day, but closed at the high on larger volume).

Since then, Brent has been trading sideways and building a base from which it can run higher. That’s another sign it might have made its low.

WTI made a new low in mid-March. Brent hasn’t even tested its low.

At Brent’s current $ 59 price, support looks like it might be about $ 54. Meanwhile, overhead resistance is about $ 64.

What an Iran Nuclear Deal Can Mean for Oil

Oil prices waned last week. Prices reflected the potential arrival of a nuclear agreement, and the possibility of sanctions being lifted.

And then on Monday, uncertainty about an Iran nuke deal took over. As a result, both WTI and Brent rallied.

In Tuesday’s trading, WTI gained again — adding 3.5% to close at $ 53.98.

The probability of Iran adding oil to global oil markets in 2015 is low.

And perhaps Iran has led us to believe that there will be a lot more oil than we will really see.

Below is a chart with Iran’s proved reserves:

Here’s what we can take away from it …

•  In 1980, Iran had about 60 billion barrels of proved reserves.

•  By 1985, Iran’s reserves fell to about 48.5 billion barrels.

•  In 1985, OPEC established a new rule for production quotas. That is, those would now be based on a country’s proved reserves.

•  The next year, most OPEC members started reporting dramatically higher reserves.

•  Iran and Iraq did not immediately increase their reserves. That’s because they were busy fighting the Iran-Iraq War.

•  After that war ended in 1988, Iran reported that its oil reserves nearly doubled.

Notice that oil reserves did not drop between 1988 and the early 2000s.

Most OPEC members’ reserve numbers look like Iran’s. If a member reported lower reserves, then their quotas would go lower.

So, there was an incentive to cheat.

The press or the energy itself usually reports about major oil discoveries. The same is true about new technologies that bring oil to market faster.

This did not happen for most OPEC reserve increases.

In fact, notice that their reserves have, very quietly, almost doubled again since the early 2000s.

Some of the increase is probably legitimate. As prices rise, oil becomes more economical to produce. So, it is natural that reserves could grow.

However, it’s likely many OPEC members have overstated their reserves. And it looks like Iran may be no exception.

The Real Oil Picture in Iran

You can get a good idea of a country’s oil production by looking at the shipments of their exports. Below is Iran’s historical production.

On average, Iran produced about 3.2 million barrels per day.

This number has dropped due to sanctions, to about 2.8 million barrels a day.

Since 1985, Iran has produced about 61 billion barrels.

So instead of having 160 billion barrels, its reserve is probably closer to 100 billion barrels.

So, we should probably question the accuracy of other OPEC members’ stated reserves. After all, their production and reserve trends look similar to Iran’s.

Production Won’t Ramp up Right Away

Analysts expect demand to increase by at least 1 million barrels next year.

If Iran can restore its production back to 3.2 million barrels per day — about 500,000 more barrels — the extra supply could help.

However, Iran likely won’t be able to return to those daily production levels until at least 2016.

Even then, energy analysts point out that Iran will have trouble financing this increased production.

To accelerate the process, Iran would need a partner like China or a major global oil company.

This couldn’t happen until after the June 30 deadline — assuming the deal is completed on time. And then it would take some time for Iran to line up these potential partners.

Eventually Iran can boost its production above 4 million barrels per day, the highest production in their history. But that would take even more time, money and partners.

And right now, the oil market recovery doesn’t look to be in danger of that happening anytime soon.

Good Investing,
Dan Hassey

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