Crude Summit: Markets to stay weak on Iran, demand

Oil markets are expected to remain weak this year as Iran prepares to step up exports, but the prospect of a return of risk premiums may help stem further losses.

Crude prices have slumped to $30/bl in a downturn that began in mid-2014, and expectations of more Iranian shipments hitting a market already oversupplied by higher volumes from Saudi Arabia and Iraq will weigh on prices, panelists at the Argus Americas Crude Summit said. Rising supply comes as demand from key consumer China remains weak.

"China is the centerpiece here," president of consultancy ESAI Sarah Emerson said. "Oil demand growth is slowing down. We will need more supplies to be absorbed for the market to balance."

China's apparent crude demand — domestic production plus net imports — hit a record high of 12mn b/d in December, National Statistics Bureau data show. But increasing amounts of crude are going into storage as crude supply exceeded refiner demand by 1.2mn b/d.

Iran maintains that it will lift oil production and exports by 500,000 b/d soon after sanctions are lifted, and by a further 500,000 b/d in the six months that follow. The directive to begin raising output at Iranian fields has already been given, deputy oil minister Rokneddin Javadi said on 18 January.

But prolonged price weakness may accelerate the slowdown in oil output growth, especially among non-Opec producers such as the US shale industry. With non-Opec output slowing, "we could see the call on Opec crude stabilizing around 32mn-32.5mn b/d, then we can see prices recover," Emerson said. "But it is more likely in 2017 than this year."

Beyond fundamentals, a return of geopolitical risk premiums may help put a floor on prices as the possibility of an attack on a large petroleum facility grows significantly amid rising tensions in the Middle East. During the Arab Spring of 2011 that saw civil unrest among producers such as Libya and Yemen, risk premium had soared as high as $20/bl.

"The Middle East has never looked worse," chief commodity strategist at RBC Capital Markets Helima Croft said. "And there is no geopolitical risk premium. The question is when does it come back?"

The latest escalation in the row between Opec members Saudi Arabia and Iran came earlier this month after Riyadh severed its diplomatic relations with Tehran in response to the storming of its embassy by Iranian protesters angry at the execution of Saudi Shiite cleric Nimr al-Nimr.

Skepticism surrounding the pace at which Iran could ramp up exports may also help support the market. Iran will re-enter the market at a slower pace than it predicts, said global head of research at Societe Generale Mike Wittner. Iran will add 200,000 b/d every three months for a total of 800,000 b/d, he said.

Wittner's views were similar to the IEA, which on 19 January said it expects Iran's output to rise by 300,000 b/d to about 3.2mn b/d by the end of March, and towards 3.6mn b/d within six months.

As producers continue to pullback drilling activities, panelists cautioned that it may be not possible to quickly ramp up output in case of sharp supply shortfall. Even US shale fields which can be turned on relatively quickly compared to conventional wells will not be able to respond because, unlike state-controlled enterprises, market-based companies will want to see a steady recovery in prices before they can get additional funding to hire engineers and put rigs back to work.

"It is like trying to crank start a car that has not run in two years," global oil and gas strategist at Macquarie Vikas Dwivedi said. "All that is going to take a while. It could be a year."