OilPrice Intelligence Report: Oil Markets On Edge As Iran Tensions Grow

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Oil prices rose on Monday after the U.S. announced a bellicose list of demands on Iran, leaving little chance of a new accord. Oil prices were up “specifically because of Pompeo’s speech,” Thomas Pugh, commodities economist at Capital Economics, told theWall Street Journal. “It certainly looks like the U.S. is going to go as hard as possible on sanctions and try their best to make it hurt.”

U.S. issues harsh demands on Iran. On Monday, Secretary of State Mike Pompeo issued a long list of extreme demands on Iran as prerequisites for a new deal, without offering any concessions or carrots. The demands include stopping all uranium enrichment activity and also stopping all support for militants in the Middle East. Unsurprisingly, Iran immediately rejected the demands. Pompeo’s speech was clearly not designed to reach an understanding between the two countries, and it puts the U.S. and Iran on track for more confrontation. America’s top diplomat also signaled that there would be little leeway granted to European companies seeking to do business with Iran.

Iran wants euro purchases of oil. Iran is leaning on the EU to make euro-denominated purchases of Iranian oil as a way to avoid U.S. sanctions. Iran says Europe’s effort to rescue the nuclear deal is so far insufficient.

Maduro prevails in the election, U.S. responds with financial sanctions. Venezuelan President Nicolas Maduro prevailed in a rigged election on Sunday, after blacklisting some opposition candidates and intimidating voters. On Monday, the Trump administration barred the purchase and sale of Venezuelan government debt, including new debt issued by PDVSA and the central bank. The U.S. held off on sanctions on oil sales for now, but a State Department official said those measures were “under active review.” Venezuela might avoid being hit by those harsher measures because oil prices have climbed to three-year highs. “I really don’t think they will ban imports in this price environment,” David Goldwyn, president of Goldwyn Global Strategies and a former special envoy for international energy affairs under the Obama administration, told S&P Global Platts.

OPEC watches Venezuela output. OPEC is reportedly watching Venezuela’s plunging oil production, which could force the group to tweak its output limits at the upcoming meeting in Vienna. “Maybe, if the market is tight, there will be a need to make some adjustment,” one OPEC delegate told Reuters.

Shell declares force majeure on Nigeria’s Bonny Light. A subsidiary of Royal Dutch Shell (NYSE: RDS.A) announced on May 17 a force majeure on Bonny Light following the shutdown of the Nembe Creek Trunk Line system. Bonny Light exports have declined by 150,000 bpd.

NextEra Energy to buy $5.1 billion in utility assets. The U.S.’ most valuable power company, NextEra Energy (NYSE: NEE)announced plans to purchase $5.1 billion in assets from Southern Co. (NYSE: SO). Southern is looking to sell off assets as its beleaguered nuclear plant in Georgia, which has suffered years of delay and billions of cost overruns, have stretched its balance sheet. NextEra will issue new debt to take over Gulf Power, Florida City Gas and take partial ownership in two natural gas-fired power plants from Southern. NextEra is the country’s most valuable utility by market cap, with an array of profitable solar and wind farms.

U.S. sanctions on Nord Stream 2 possible. A German envoy for Trans-Atlantic relations told Bloomberg that a Trump administration official signaled that U.S. sanctions could hit Germany if it moves forward with the Nord Stream 2 natural gas pipeline from Russia. The U.S. is trying to prevent more Russian influence in Europe, but the sanctions would only deepen the crisis in the Trans-Atlantic relationship.

Hedge funds cut bullish bets on crude. Hedge funds and other money managers trimmed their net long positions on oil futures for a fifth week in a row, which represents the longest consecutive weekly declines since November 2016. “Positioning was long coming into the year, and you have the June 22nd OPEC event on the horizon,” Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC, told Bloomberg. “People likely have made money. You can take some profits and then get back in should they continue to be consistent in their messaging.” Net longs for WTI declined by 6.2 percent for the week ending on May 15.

Average U.S. gasoline price rises to $3 per gallon. Average regular retail gasoline prices in the U.S. hit $3 per gallon in the past two weeks, rising by 41 cents over the past three months.

Brent futures rise. Even as spot and near-term Brent oil prices hit $80 per barrel last week, the longer-dated futures also rallied. The five-year Brent forward prices rose to $63.50 on Friday, after trading below $60 per barrel for the past year and a half, according to Bloomberg. The increase is significant because it arguably represents an end to the belief that oil prices will remain trapped at relatively low levels for years to come. “For the first time since December 2015, the back end of the curve has been leading the complex higher,” Yasser Elguindi of Energy Aspects, told Bloomberg. “It seems that the investor community is finally calling into question the ‘lower for longer’ thesis.”

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