Iranian Rope-A-Dope

Jim Brown
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Nothing changed in the negotiating tactics employed by Iran in its meeting with the IAEA this week. Talks with the IAEA ended abruptly not long after they started.

True to form, like I warned last week, Iran claimed progress in the talks and agreed on "some points" with the IAEA. The Iranian negotiator said "In addition to removing some differences and agreeing on some points in the text ... the two sides decided to review and exchange views about the new proposals that were given in this meeting, in the next meeting."

In Iranian speak that means they did not talk about anything specific and Iran presented them with a new list of proposals on topics not related to the nuclear issue. This is almost word for word exactly what Iran said after the last meeting.

The "next meeting" has not been scheduled and typically it is as far into the future as Iran can schedule it. The IAEA had allotted three days for this week's meeting and it lasted less than one day before Iran ended it. This was the eighth round of talks and the third in the last three months.

The IAEA had hoped to discuss persistent differences with Iran that are keeping the IAEA from restarting a stalled investigation into suspected weapons research by Iran. Iran said last week that access to the Parchin weapons research area, which has already been scrubbed clean, could be allowed if the sanctions were lifted and Iran was allowed to continue enriching uranium. Clearly that is not going to happen.

Iran successfully pushed discussion about the IAEA investigation a few months farther into the future and they are probably high fiving each other all over the presidential palace.

The IAEA has not yet made an official announcement on the outcome. At one meeting last year it took them two days to come up with a suitable announcement that would not "anger" Iran. Seriously, that is what they said privately.

Last year the U.S. set a March deadline for Iran to begin cooperating with the investigation or the matter would be referred to the UN Security Council.

Iran and the P5+1 nations are scheduled for higher level talks in Kazakhstan on February 26th. Nobody expects those talks to produce any fruit either. The P5+1 talks have been in progress for nearly a decade with no results.

Israel reaffirmed this week its claim that progress must be made by this summer or they may have to act on their own to stop Iran militarily from further enriching uranium. Netanyahu said by installing the 10,000 new centrifuges Iran was "crossing the red line" towards getting the bomb. Iran's foreign ministry spokesman scorned Netanyahu's comments as "laughable" and said Israel was an illegitimate regime.

Crude prices dipped on the headlines out of Iran but it was just an excuse for profit taking. Nobody expects Iran to agree to anything anytime soon. WTI closed at $97 and Brent $118.72.

On the inventory front crude levels only rose +600,000 barrels. Analysts were expecting +2.2 million. Imports declined -56,000 bpd. However, U.S. production rose to 7.06 mbpd and a 20 year high.

The preparations for winter storm Nemo caused a decline of -3.7 million barrels of distillates. Those are heating oil, jet fuel and diesel. Distillate demand rose +318,000 bpd as homeowners and businesses rushed to top off heating oil tanks ahead of the storm. We will probably see the opposite next week as the post storm demand declines.

Inventories at Cushing declined -1.2 million barrels to 50.2 million. With WTI expiring next Wednesday we could see that level rebound next week.

Refinery utilization declined to 83.8% and that could also tick up slightly next week as they replace that distillate decline. However, we are entering the maintenance season and overall utilization will likely decline over the next two months as plants perform maintenance before the switch over to summer fuel blends.

Gasoline inventories declined slightly but the 2-3 day moratorium on driving in the Northeast probably will cause inventories to rise over the next two weeks as that demand was pulled forward ahead of the storm and then consumers were unable to drive for up to three days while the roads were cleared.

Clearly the inventory numbers over the next couple weeks are going to be worthless. They will create short term volatility but they have no bearing on long term demand.

Inventory Snapshot

Crude Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

The EIA posted a map of pipelines under construction and anticipated completion dates. The various pipelines are going to facilitate takeaway capacity from the Denver Julesburg Basin, Anadarko Basin, Permian Basin and the Eagle Ford Shale. Currently takeaway capacity is limited and oil from those areas sells at a discount to WTI to compensate for transportation issues.

There are ten new pipelines flowing south that will be completed in 2013-2014. Over the last two years the capacity for delivering oil to Cushing has increased by 815,000 bpd. That was not met with additional capacity in the same amount from Cushing to the coast. That allowed for WTI to backup in storage at Cushing. The Seaway pipeline with a capacity of 150,000 bpd was reversed to go from Cushing to the coast. The capacity was upgraded to 400,000 bpd but downstream bottlenecks appeared that have limited the capacity to 150,000 bpd until late this year.

Later this year the Seaway pipeline will be "twinned" with a projected start date of early 2014. That will increase the total Seaway capacity to 850,000 bpd. The Transcanada Gulf Coast Express pipeline with a capacity of 700,000 bpd is expected to come online in Q4-2013. That will increase the takeaway capacity from Cushing by 1,225,000-1,315,000 bpd.

At the same time the Enbridge Flanagan South Project will add 600,000 bpd south from Patoka Illinois to Cushing. That will come online in mid 2014. The Tallgrass Pony Express conversion will come online in Q3-2014. This is a natural gas pipeline that is being converted to oil and will ship 230,000-320,00 bpd of oil from the Bakken and the Denver Julesburg Basin to Cushing.

There are six projects that will ship oil from the Permian directly to the coast. Capacity of 355,000 bpd will come online in 2013 and another 478,000 bpd in 2014.

Over the last three years 815,000 bpd of new capacity to Cushing has been added but offset by only 400,000 bpd of capacity out of Cushing. Over the next two years an additional 1.19 mbpd will be delivered to Cushing offset by an additional 1.15 mbpd of capacity from Cushing to the coast. Add the 830,000 of new capacity from the Permian and Eagle Ford to the coast and there is going to be a huge influx of WTI oil headed to the coast to be sold at Brent prices.

The roughly 2.0 mbpd of new WTI headed south is going to equalize the WTI and Brent prices. Goldman believes the spread will decrease from the nearly $20 today to something in the $5 range by year end. The $64 question is "Which price is going to move the most?" Will WTI rise or Brent decline? I am betting on WTI prices rising with the midpoint of WTI-Brent in the $110 range.

There will likely be a early summer sell off and then a rise late in the summer as traders get a better handle on the various pipeline completions.

Pipeline Map

Gasoline prices continue to rise with the average rising to $3.61 last week. That is nine cents higher than the same week in 2012. It is also the highest price for this week since the EIA began collecting data. Diesel prices rose to $4.10 per gallon and 16 cents higher than last year. This is also the highest price for this week since the EIA began collecting data.

Jim Brown

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