“We Have Ignition”: Iran Tape Bomb Sends Crude Higher

We’ve said it before and we’ll say it again: when it comes to crude prices, it’s all about geopolitics one way or another.

There’s way too much emphasis placed on discrete rig count prints and US inventory data. Concurrently, there’s way too much credence given to the idea that OPEC is “dead.” The whole point of a cartel is that you can push prices around at will. But prices don’t just go up. They can go down too. You don’t cease to be an effective cartel just because prices fall as long as that price drop was engineered by you. And crude’s prolonged rout was indeed engineered by the Saudis.

Since late 2014 when Riyadh decided prices needed to slide, the geopolitical backdrop has changed materially. Russia’s entry into the Syrian conflict on the side of the Iranians and Tehran’s efforts to ramp production after international sanctions were lifted have conspired to transform the oil market into a Sunni-Shiite proxy war with Russia along for the ride. Now everyone’s pumping at capacity.

(Chart: SocGen)

Last week, we noted that calling crude prices is a fool’s errand. Here’s an excerpt:

“Frankly this is just a crapshoot. At a certain point the number of variables involved increases to a point where “analysis” is no longer possible. It’s the same reason why economists and weathermen are wrong more than they’re right. “The best one can expect from Russia, Saudi Arabia, Iran, Iraq is possibly agree not to have market-share war,” Credit Suisse’s Jan Stuart said today.”

“Ummm, Jan? We’re not sure if you’ve noticed or not, but that ship sailed a long, long time ago. The horse has left the barn. [Fill in any other applicable metaphor].”

Well this morning the OPEC headline hockey farce was back when this hit at 10:52 ET:

  • IRAN SAID TO SEND SIGNALS MAY SUPPORT JOINT ACTION ON OIL:RTRS

Here’s what happened next:

That’s all it takes. Just one headline. It’s completely silly, but it does demonstrate the extent to which this is and probably always will be about OPEC and Russia.

Of course it doesn’t really matter. As we’ve said on too many occasions to count, you’re not really “freezing” production if you’re producing at capacity. That’s like saying you’ve agreed to “freeze” your speeding when your car reaches its top speed. Here’s what Goldman had to say this morning:

“While oil prices have rebounded sharply since August 1, we believe this move has not been driven by incrementally better oil fundamentals, but instead by headlines around a potential output freeze as well as a sharp weakening of the dollar (and exacerbated by a sharp reversal in net speculative positions). A deal to freeze production when OPEC and some non OPEC producers meet in Algeria on September 26-28 is possible in our view, after six failed attempts, as it would show signs of cooperation from Saudi’s new energy minister. But the possibility may not be high – Russia’s energy minister commented on August 8 that he did not see the basis for such a freeze (with legislative elections taking place before the meeting). Further, Saudi and Iran continue to focus on market share and therefore appear unlikely to unilaterally accept a freeze or implement a jointly agreed one. Ultimately, freezing production at current levels would leave 2H16 output from OPEC (crude) and Russia at 44.6 mb/d, 400 kb/d higher than our forecast as we assume a seasonal decline in Saudi volumes. Longer term, a production freeze would also likely prove self-defeating if it succeeded in supporting oil prices further with the US oil rig count up 28% since May. Finally, the correlation to the dollar has not been steady and oil fundamentals, as they did in May, can drive divergence in asset prices. Further, our FX strategists view the recent strength of the US economic data as leaving risks to the dollar skewed to the upside, not downside.”

(Chart: Goldman)

That analysis pretty much captures it all. The bit about the whole thing being self-defeating due to US production which is emboldened at around $50 is especially important.

Will get an API report around 4:30 ET today which may or may not look anything like the EIA report we’ll get tomorrow.

All of the above just supports our contention that trying to predict how crude is going to trade on any given day is impossible. Especially not when one tape bomb like the one we got this morning is enough to make the algos hit the ignition switch.

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