Iran War with Saudi Arabia?

Jim Brown
 
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The first load of WTI has left the country and ConocoPhillips was the exporter. Do not expect WTI prices to suddenly rebound because the export ban has been lifted.

A little over two weeks ago President Obama was forced to sign the new budget bill that included lifting the 40-year old export ban on U.S. crude oil. Analysts thought at the time that it would take several months for producers to gear up and get the process worked out to export WTI.

Apparently, that was not the case. ConocoPhillips (COP) and Nustar Energy (NS) teamed up to export the first tanker of Eagle Ford light crude and condensate from the Port of Corpus Christi in Texas on Thursday. This was possible because Nustar has been building out its storage facility in the Port and its pipeline systems in Texas. They are currently building a new dock that will give them the capability to load four tankers at once at the rate of 90,000 barrels per hour for each tanker.

Nustar has 8,700 miles of pipelines and 79 terminals with storage capacity for 93 million barrels of crude oil and refined products. As soon as the ban on exports was lifted Conoco arranged for the export using the Nustar facilities and sold the first load to energy trader Vitol. They are delivering the load to Italy where the ultra light oil will be blended with heavier crude to make it easier to refine.

Conoco beat Enterprise Product Partners (EPD) to the punch by several days. Enterprise had previously announced that it expected to export the first load of 600,000 barrels from Houston during the first week of January.

Conoco did not disclose how many barrels were shipped on the Theo T tanker to Italy. I looked all over the Internet and could not find a reference or the capacity of the Theo T. It may have been just a token amount to beat EPD to the punch and test the market for exports.

Some analysts were quick to suggest that the export of WTI would solve our problem of rising inventories in the USA. That is far from the truth. First, U.S. refiners do not want to refine the ultra light crudes from the shale plays. They make more money refining the heavy crudes from overseas because they produce more diesel, heating oil, jet fuel and other products. The ultra light shale crude is suitable only for gasoline and a bunch of gassy products that have very low value. Most refiners would rather WTI was exported to take the pressure off of them to refine it. Some of the Midwest refiners actually prefer the ultra light because it has less byproducts like sulfur that has to be disposed of. It is also cheaper since it is produced in their backyard and they can make money because of the discount. Examples would be Holly Frontier (HFC) and Western Refining (WNR).

Let's review the past week's developments. Conoco exported some quantity of oil, let's call it 600,000 barrels to equal the planned Enterprise load for this week. That is 1.2 million barrels. Imports last week rose 566,000 barrels PER DAY to 7.89 mbpd. We would have to export a shipload per day to make any dent in the potential inventory rise in the coming months. Granted it is early in the process but to export 600,000 bpd would require a lot of shifting of inventories in storage and the redirection of flows from the various shale fields. I seriously doubt this is going to happen in the next few weeks.

Also, to offset the inflows of ultra light oil into the refineries they will immediately increase imports of heavy crude from overseas.

In this scenario, everyone is happy. The producers have a way to get rid of their ultra light production and the refiners can import their oil of choice from Mexico, Venezuela or the Middle East. Everyone is happy!

Two weeks ago, I showed a chart of U.S. inventories compared to their five-year average. I reprinted the chart below and you can see from the beginning of January to the end of April the historical build rate in gray is steady. I do not expect the export of WTI to impact this build rate.


This means we are about to embark on a series of inventory gains that will push crude prices significantly lower. This is historical. Prices normally decline in this period and then rise once we get to May and investors begin to speculate on the rising demand in the summer driving season.

The wild card this winter is the relations between Iran and Saudi Arabia and the pending removal of sanctions against Iran. Last week Saudi Arabia executed 47 "terrorists" and enemies of the state. One of those enemies was Nimr al-Nimr, a leading Shiite cleric and a vocal critic of the Saudi royal family, which is Sunni. Iran is Shia and they are mortal enemies.

In Iran demonstrators stormed the Saud embassy and set it on fire. Iran's supreme leader Ayatollah Ali Khamenei warned Saudi officials they will face "divine" revenge for their actions. In Riyadh, Saudi responded by cutting ties with Iran and giving the Iranian ambassador 48 hours to leave the country.

Saudi's execution of the 47 terrorists and enemies of the kingdom was an example of their "get tough" policy against Iran and internal dissenters. Iran is a global sponsor of terrorism and is waging a proxy war against Saudi in Yemen.

Here is the major problem. Oil prices spiked $1 on the open of trading on Sunday night because of the rising hostilities between Iran and Saudi, two of the biggest oil producers in the Middle East. If a shooting war develops the most likely targets will be the oil fields and production facilities for either country. It is easier to cut off a country's lifeline of cash than kill a lot of innocent civilians. If this were to happen we could see oil prices at $100 or higher in a matter of days.

This is the offsetting factor for oil prices declining because of rising inventories. Hopefully the Iran/Saudi conflict will cool in a few days and nothing will come of it.

The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

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  Active Rigs

Active drilling rigs declined -2 to 698 for the week ended on Friday 12/31 and that is a 10 year low. Oil rigs fell -2 for the week to 536. Active gas rigs were unchanged at 162. Active rigs have now declined -1,233 since the high of 1,931 in September 2014. Active offshore rigs rose +1 to 25.


Oil Inventories Week Ended 12/11/15

Crude inventories rose +2.6 million barrels to 487.4 million.

Refinery utilization rose from 91.3% to 92.6%. That is up from the low of 86.0% on October 9th.

U.S. production rose +23,000 from 9.179 to 9.202 mbpd.

Cushing inventories rose from 62.1 million to 63.0 million and a record high.

Gasoline inventories rose +0.9 million barrels to 221.4 million as refiners accelerated production of winter blended fuels.

Distillate inventories rose +1.7 million barrels to 153.1 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. Green represents a recent high and yellow a recent low. The blue-green represents a record high.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

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