Commodities | Nov 18 2013
– Iran may soon begin exporting crude again
– Global supply already exceeding demand
– US set to become world's largest energy exporter
– Energy prices to come under pressure
By Greg Peel
While talks between Iran and representatives of The West over the former’s nuclear program and the latter’s subsequent economic sanctions are yet to reach any resolution, progress has apparently been significant and monitoring accords are now in place for the first time in six years. The Iran-West freeze has not exactly melted, but a thaw seems underway under the new Iranian regime.
For pretty much the whole post-GFC period, after the crude oil price recovered from its initial plunge and indeed soared, a geopolitical premium of some form or another has been built into oil pricing. We’ve seen battles between Israel and neighbours, the Arab Spring, the Syrian civil war and for many years, limited Iranian oil exports given Western economic sanctions, which are themselves a response to Tehran’s apparent determination to establish nuclear weapons capability.
As Citi suggests, any deal with regard to Iran is likely to be “modest and easily reversible”, given the substantial risk of being derailed by US and/or Iranian domestic politics. But Iran is dying economically under the weight of sanctions and lost export dollars, hence there is a good chance Iranian oil will begin to flow once again. This will particularly impact on Asian crude markets, Citi suggests, as precautionary stockpiling is reduced in the only area of the world currently showing strength in demand for oil.
Not that Iranian oil has been particularly missed, as it once would have been. Global oil demand is weak yet robust supply growth is emanating from the US, Brazil, the Caspian Sea and even Iraq. A resumption of Iranian exports would just add to oversupply. And that’s just crude. As Citi points out, you just don’t want to know how much natural gas Iran is sitting on. (Note that Qatar’s massive gas reserves are one half of a resource of which Iran owns the other half, but has yet to exploit.)
Macquarie estimates 2014 global oil demand growth of 1.1m barrels per day and supply growth of 1.5mmpd. This is the largest oversupply the analysts have ever estimated. Macquarie is not yet lowering its oil price forecasts given an ever present supply disruption risk, with production challenges likely to continue in Libya, Nigeria and Algeria. Political stability in Iraq is also tenuous.
On the natural gas front, US domestic production has now reached 67bn cubic feet per day which is around 1.8, 3.3 and 8.6bcfd above the same time in 2010, 2011 and 2012, Macquarie notes. The analysts have raised their end of summer 2014 storage estimate to 4200bcf but estimate maximum storage capacity at 4100bcf. A mild summer could push supply to a “physically impossible” level above storage capacity, Macquarie warns, which would force a respective reduction in gas price.
Macquarie is forecasting an average 2014 gas price of US$3.64mmbtu but suggests prices could touch as low as US$2.00.
US exports of energy – petroleum products, LPG, pipeline natural gas and coal — have now passed agricultural products in value and are jostling with transportation equipment as America’s leading export category, Citi notes, accounting for one sixth of total. The US nevertheless remains a large importer of crude oil, although recent stagnant domestic demand has meant the US is now number two behind China.
In one year’s time, Citi believes the US will become the world’s largest exporter of petroleum products, rising above Russia and transforming the role of the US in global energy markets. The US will soon surpass Saudi Arabia as the largest supplier of LPG. With the potential to be both the largest importer and the largest exporter, or close enough to it, the US will become the most influential factor in global trade, with significant implications for pricing and market structure as the principal global hub, Citi notes.
Within two years, a combination of US pipeline gas and LNG export should trigger a five-year surge, Citi suggests, taking the US to the top ranks of global gas exporting as well. America’s dominance and spot-price-at-the-hub structure is threatening the longstanding oil-indexed pricing structure of the global gas trade. Russia’s Gazprom has already been forced to incorporate a significant element of hub pricing into European contracts, Citi notes, and Qatar has been forced to respond to a buyer rebellion against oil-indexed LNG pricing.
That said, the US political system has been slow to appreciate the new reality of the importance of hydrocarbon exports, says Citi, to the US current account and national interest. Law-makers to date are stuck in a Cold War, Arab oil embargo mentality, but the ground might be shifting more quickly than most realise in the analysts’ opinion. Sooner rather than later, crude oil could be taken off the US restricted export list as production leads to a glut at the Gulf Coast refining centres.
With regard to LNG export, the Obama Administration has to date approved four projects for development while Canada is also moving down the export path. From Australia’s point of view, the time and cost required to build LNG facilities ensures North America is no competitive threat to the large east and west coast LNG export operations due for start-up in Australia in the 2014-16 period. Nevertheless, by 2020 and beyond, the picture may change.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.