Schachter’s Eye on Energy: Iran Nuclear Talks Making Progress In Vienna. If Successful Iran Could Raise Production By 1-2Mb/d By Year End

Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.

EIA Weekly Data: The EIA data on Wednesday May 26th was mixed. Commercial Crude Inventories fell 1.7Mb to 484.3Mb as Net Imports fell by 265Kb/d or by 1.9Mb on the week. If there had been no change in Net Imports, Commercial Stocks would have seen a modest increase. Motor Gasoline Inventories fell 1.7Mb as gasoline demand rose into the beginning of the holiday driving season. Refinery Utilization rose 0.7% to 87.0% last week (last year 71.3%). US Crude Production remained at 11.0Mb/d. Over the coming months we see this lifting to 11.5-12.0Mb/d as the increase in drilling activity and higher energy company cash flows are reinvested to stabilize production volumes which are still declining for many producers. 

Total Product Demand rose last week by 685Kb/d to 19.96Mb/d. Gasoline Demand rose by 254Kb/d to 9.48Mb/d. Jet Fuel Consumption rose 213Kb/d to 1.4Mb/d. So far this year overall demand for products is 5.8% above last year as we recover from the pandemic plunge. Motor Gasoline demand is up by 9.4% from last year but Jet Fuel remains a negative component, down 2.4% from a year ago. This may turn positive in the coming weeks as it appears that travel around the upcoming Memorial long weekend will see record airline travel. Cushing Inventories fell last week by 1.0Mb to 44.8Mb compared to 53.5Mb last year.

Baker Hughes Rig Data: The data for the week ending May 21st showed the US rig count rise  by two rigs (up five rigs in the prior week). Canada had a decline of one rig (up four rigs in the prior week). Canadian activity is now up 176% from the pandemic lows of last year. There are 58 rigs working in Canada now compared to 21 rigs working last year. In the US there were 455 rigs active, up 43% from 318 rigs working a year ago. In the US they had an increase of four rigs drilling for oil to 356 rigs and this is up

 50% from a year ago. The state with the biggest increase in rigs this week was Oklahoma.

Conclusion:

Over the next two months OPEC will increase production by 2.1Mb/d with latest industry  reports showing them having increased production by 1.0Mb/d in May. With worldwide demand now around 95-96Mb/d we expect by year-end demand may rise to 97Mb/d, but not back to pre-pandemic levels of 100-101Mb/d forecast by some energy bulls. Goldman Sachs and Barclays are calling for US$80/b by Q4/21 if demand rises to over 100Mb/d.

Bearish pressure on crude prices:

1. Vaccine hesitation and vaccine resistance is likely to delay herd immunity. Many individuals in the US who have their first shot of the Pfizer or Moderna vaccine have not gone to get their second shot even though they are eligible. The US as of yesterday was at 591K deaths. Worldwide deaths have risen to 3.46M.
2. Rising mutation caseloads in Malaysia, Singapore and Taiwan are new outbreak areas.  Japan’s ICU health care system is at capacity and their largest cities (Tokyo and Osaka) are facing rising case loads. There is increasing pressure to cancel the Olympic summer games. Vaccination rates in the country are extremely low at 5% inoculated so far. The US State Department has issued a travel advisor for the country.  
3. Iran is making progress to return to the UN nuclear deal and if an accord is completed by June, they could increase production quickly by 1Mb/d and over the next year by an additional 1Mb/d to lift production from 2.39Mb/d produced in April 2021. Iran last produced over 4Mb/d in 2016. A deal would lift current sanctions on Iran’s oil, banking and shipping sectors. Iran has a new 1,00Km – 1Mb/d pipeline coming on this month that bypasses the Strait of Hormuz. It is situated in the Gulf of Oman. It will make shipping crude cheaper to buyers in Asian countries.

Bullish pressure on crude prices:

1. Rising vaccination levels across the US is lifting energy consumption. 
2. Weather impacts should start soon in the Gulf of Mexico which would necessitate shutting in some of the offshore production. 
3. Optimism over international travel, as restrictions are lifted, is gaining momentum and some forecasters expect global Jet Fuel demand will rise by 1.0Mb/d by year end. The exception is India which is seeing international flights cancelled due to the rapid spread of the disease.
4. Vaccine passports (or certificates) are getting more support from countries, increasing the likelihood of a 2021 summer tourism industry in Europe. The UK may lead the way with passports and may start to issue them as early as next month. 

CONCLUSION: We remain skeptical of the optimism about a full recovery in energy demand before year-end. The tug of war between the normal summer holiday travel demand and the 3-4Mb/d increase in crude oil supplies  this year remains the key determinant of future energy consumption and crude oil prices. 

WTI crude oil prices are down modestly today to US$65.62. A breach of USS$60/b would have negative implications. Technically a close below US$57.63/b (the early April low) would be very bearish and set up a decline to US$48-52/b. 

Energy Stock Market: The S&P/TSX Energy Index trades currently at 125. A close below 111.00 (the mid-April low) should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The expected general stock market weakness would be the catalyst for the energy sector to lose its current momentum and back off meaningfully.

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