A false sense of security

Published at 12:24 14 May 2018 by . Last edited 15:12 5 Nov 2018.

With Venezuelan crude exports stymied by ConocoPhillips seizing PDVSA’s Caribbean assets and substantial threats to Iranian exports after Trump moved to re-impose sanctions on the Islamic Republic, future oil market balances have changed significantly. This is despite prompt softness—likely to last for a month—especially in NW Europe thanks to the arrival of record US exports.

Just how much Iranian crude exports will fall is up for debate, with many expecting negligible losses as Europe remains in the JCPOA. However, the US dollar sanctions kicking in after 90 days are extremely restrictive and Europe cannot force private companies to deal with Iran. Almost all transactions with the Iranian energy sector will be subject to US secondary sanctions, and many legal cases resulting in large fines have left the financial community extremely cautious.

Even assumptions that China will not comply at all may be simplistic. Zhuhai Zhenrong which has a term deal of 0.24 mb/d with Iran and independent refiners will not comply, but Unipec is likely to make some cuts given its increased exposure to the US through imports and investment.

We assume Iran’s exports will fall by 0.4 mb/d based on limited compliance from China, but Iran will fill its storage first, so we have only adjusted Iranian output lower in Q4 18. We have also raised GCC and Russian Q4 18 production as we believe they will only raise output once there is a physical shortfall rather than pre-emptively, which will only be at year-end. Still, this takes our Q4 18 stockdraws to 1.1 mb/d with full-year draws at 0.6 mb/d. But if OPEC/non-OPEC producers raise output, spare capacity as a percentage of global demand will fall below 1.5% and, while prices may sell off initially, the market will quickly realise there are no global shock absorbers left.

Global balances and changes, mb/d Venezuelan crude exports, mb/d
Global balances and changes Venezuelan crude exports
Source: Energy Aspects Source: Kpler, Energy Aspects

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