Iran export reductions to be TRIPLE consensus?
Today’s indication from the US State Department that no waivers will be granted for Iranian oil imports and that it is their desire that Iran exports “go to zero” is a very, very important development for the oil market. Informed forecasts are now pointing to a reduction in Iran oil exports of 1.5-1.6MM Bbl/d by the end of this year. This is TRIPLE THE MARKET CONSENSUS and is a much more hawkish stance than what the prior administrations had taken (100% immediate reduction vs. 20% reduction per quarter).
What does this mean? We believe that OPEC+Russia only have 1.7MM Bbl/d of spare capacity. Accounting for the ~0.9MM Bbl/d of incremental production announced over the weekend (OPEC 0.7 + Russia 0.2) we believe this takes global spare capacity below 1MM Bbl/d. This is really, really important. The last time spare capacity got to such a low level (below 1.5% of total production) oil spiked to $147/bbl. 1% spare capacity leaves the world without any emergency buffer in the event of a political disruption (say like in Libya overnight where General Haftar handed over control of the country's largest export port to a non-UN recognized government and could mean the continuing loss of ~0.4MM Bbl/d of exports!).
Before today we had accounted for no Iran exports + Venezuela declines in 2018 and 0.8MM Bbl/d of collective declines in 2019. Of this Venezuela was 0.3MM Bbl/d (likely to be much higher) and Iran was 0.5MM Bbl/d. Today’s announcement triples our Iran disruption. We already had OECD inventories hitting the lowest level in history by May 2020 and today's statement accelerates the timeline on that possible event.
In short, a plausible reduction in Iranian exports by the end of 2019 could consume all of the spare capacity within OPEC and Russia. We are on a path towards unchartered territory. This event reinforces our view that oil is heading into triple digit territory in 2020 (today just made it a possible 2019 event). With oil only up 3.5% and some oil stocks only up 2% I do not think people are appreciating the significance of today.
We are in a multi-year bull market for oil.
Senior Portfolio Manager
Ninepoint Energy Fund / Ninepoint Energy Opportunities Trust
Source: Ninepoint Partners
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Source: Bloomberg, Energy Intelligence
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