Put Up or Shut Up

Jim Brown
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The UN nuclear inspectors are scheduled to visit two nuclear sites in Iran on Monday when the interim six month agreement begins. They are supposed to supervise a reduction in enrichment from 20% to 5%.

The inspectors have been meeting with their Iranian counterparts since their arrival in Iran on Sunday. A team of 10 inspectors will visit enrichment facilities at Fordo and Natanz in groups of 2-3 according to Iran.

Not only is Iran supposed to halt enrichment to 20% starting on Monday but they are also supposed to begin diluting or oxidizing part of their current stockpile. The goal is to make it harder for Iran to produce a nuclear weapon with supplies on hand.

In return the EU and the U.S. have agreed to give Iran access to the $4.2 billion in oil revenue funds frozen as a result of the sanctions. They will also suspend sanctions on Iran's petrochemical exports and imports of goods and services for its auto sector.

The interim agreement calls for more intrusive inspections of Iran's nuclear facilities. The IAEA is allowed daily inspections rather than weekly and for the first time gives them access to the centrifuge facilities.

This is the put up or shut up time for Iran. If they fail to follow through on the agreement or are found to be attempting to hide operations or enriched uranium then the entire agreement could fall apart very quickly. The P5+1 nations are likely to press the envelope in order to get as much information on Iran's operations as possible in the early days before Iran stiffens its resolve and starts pushing back on the terms.

Once Iran transfers the $4.2 billion and gets their critical first shipments of goods and equipment they will not be as agreeable about future inspections.

This agreement is a test of Iran's commitment and it is one they are likely to fail. Once the "intrusive inspections" really become intrusive it should be interesting to see how they react.

Iran produced 2.88 mbpd of oil in December and exported less than 1.0 mbpd. Under the agreement they can export more and the U.S. will temporarily loosen demands for other nations to buy less Iranian oil. This is going to cause Brent prices to fall once those exports begin.

In South Sudan the rebel forces appear to be in control of Malakal, the capital of the oil-rich Upper Nile state. Bentiu was recaptured by government forces last week as a result of heavy shelling and aggressive military attacks. The death toll has risen over 10,000 and 468,000 people have fled their homes to avoid the violence. The oil output from South Sudan continues to be sporadic and at times has nearly been halted. South Sudan exports 245,000 bpd through a pipeline across Sudan. The country of Sudan received about $1.5 billion a year in fees from this pipeline. The president of Sudan flew to South Sudan last week to discuss a joint plan for ending the rebel violence and resuming the export of oil. So far there have been no improvements.

In stock news Shell (RDS) issued its first profit warning since 2004. The company said adjusted earnings for Q4 would be in the range of $2.9 billion compared to estimates of $4.9 billion. The company said rising costs and stagnant oil prices were to blame. Maintenance shutdowns had cut output and disruptions in Nigeria had limited production there. Shell also said weak refining margins were a drag on profits.

Shell said the drag on Q4 profits was not likely to continue and the impact to 2014 would be limited. Shell is going to offset rising costs with a faster pace of asset sales. Shell was expected to spend $15.8 billion in Q4 and $44.3 billion for the entire year on capex.

Shell may also take a charge of up to $1 billion for unsuccessful drilling offshore French Guiana.

Schlumberger (SLB) reported profits that rose +22% for Q4 as customers spent more money trying to drill in difficult locations. Earnings per share were $1.26 and beat analyst estimates. Revenue rose +7.4% to $11.9 billion. Sales in the Middle East and Asia rose +18% with profits rising to 26% in the region. The company raised its dividend +28% to 40 cents.

SLB said a temporary shutdown of operations in Iraq due to security issues had hampered results. Seasonal slowdowns in the U.S., the North Sea, Russia and China also weighed on results. This suggests the outlook for SLB over the coming year is becoming increasingly better. The one area presenting challenges is Brazil with rig activity slowing as the push to develop offshore reserves hits some snags.


The market is still mixed and there is no conviction in either direction. Tech stocks and small caps are the best performers but the broader market is struggling. The Dow is in a declining trend and the S&P can't seem to overcome short term resistance.

I would be wary of adding to any long plays unless you are buying them on the dip. Wait until the S&P moves over 1,850 before chasing prices higher.

Jim Brown

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