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May 11 Energies Update

by Archer Financial Services | May 11, 2018
by Steve Platt and Mike McElroy

Price Overview

The petroleum complex continued to trade near levels not seen since November 2014 as traders wade through the implications of the US decision to withdraw from the nuclear deal and reintroduce sanctions against Iran. Forecasts that Iranian exports might fall between 300 tb/d and 1 mb/d by December of 2018 continue to dominate sentiment.

Despite the speculation, there does not appear to be a clear-cut consensus regarding the impact on Iranian exports following the decision. Initially, oil buyers will be able to apply for exemptions from the sanctions. In addition there is a wind down period of up to 6 months in which will allow companies to end contracts, terminate business and get their money out.
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The imposition of oil curbs will not be an easy task given that the US is going it alone this time around and will not have the support of its major European trading partners. The US Bureau of Energy Resources faces a daunting task in implementing the sanctions given not only the radical changes at the US State Department and their own lack of a division head, but also the fact that European leaders oppose the current US policy on Iran and are looking for ways to block the sanctions. Another factor to consider is that the US Federal Reserve is able to track the buyers, sellers, traders, shippers and insurers involved in Iranian oil purchases because all foreign transactions are executed in US dollars and cleared by the Federal Reserve. What happens if these transactions shift to Euros or even cryptocurrencies?

The US has banned Iranian oil imports for decades, so the biggest impact of withdrawing from the nuclear agreement falls upon Europe, which imports close to a quarter of Iran’s crude. Other major buyers are India and China. Whether they will respect the US sanctions policy and give up their own sovereign rights remains to be seen. Already China’s state owned energy company CNPC is ready to take over Total’s stake in the giant South Pars gas project if the French company leaves due to the sanctions. Surely other foreign entities will fill the gap left in the wake of this move if money can still be made and the sanctions can be ignored.

For the oil market, Iranian exports are only one uncertainty. What impact the move will have on the OPEC agreement, how higher prices will effect demand, continued expansion in US production, and investment trends due to the favorable price outlook are other uncertainties that will need to be watched closely for their ultimate impact. Keeping it all together from a supply demand perspective gets harder as prices increase.

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Natural Gas

Prices were little changed today on light volume following the strong upward action seen yesterday, when the market reacted to the 89 bcf build in stocks by rallying by over 7 cents to end the session at 2.814 basis June. The reaction was somewhat surprising given that the final estimates prior to the report were pointing to a 91 build. Forecasts were little changed for the coming 2 weeks with expectations for warmer temperatures offering underlying support while production levels continue at a record pace and keep a lid on any moves higher. Look for recent strength to be containded near the 200 day moving average near 2.83 in the near term until we get through the shoulder season and start to get a better sense of summer temperature trends.
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Charts Courtesy of DTN Prophet X

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options ADMIS position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to. The authors of this piece currently maintain positions in the commodities mentioned within this report. Charts Courtesy of DTN Prophet X, EIA.

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