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3/31/15

Energy Supplies: Oil - Its all about Geopolitics

The Oil and Energy Insider reports that when it comes to geopolitical events affecting oil prices, there is no shortage of possibilities. Whether it is the outbreak of a war, a terrorist attack, a massive industrial accident, or a financial crisis, these events usually take the oil markets by surprise. It is not too often that there is a major geopolitical event that will have enormous influence over oil prices yet is known ahead of time. But we are in the midst of one of those rare moments: we are arriving at the deadline for the negotiations over Iran’s nuclear program, with the clock running out at midnight on March 31. The two sides are furiously negotiating, trying to overcome their differences to make history. A comprehensive agreement between Iran and the West was always going to be extraordinarily difficult and would involve painful concessions on both sides. But there is some indication that a deal is there to be grabbed if the major world powers want it.

The Russian Foreign Minister had previously bailed on the talks, saying that he would only return if a deal looked realistic. However, he did in fact decide to fly back to Switzerland and rejoin the talks on March 31 as there were signs of progress. “The chances are high. They are probably not 100 percent but you can never be 100 percent certain of anything. The odds are quite 'doable' if none of the parties raise the stakes at the last minute,”
Russian Foreign Minister Sergei Lavrov told Russian media in Moscow.

The outcome of the negotiations will have an immediate effect on the price of oil, one way or another. If the parties come to terms – and reach a truly historic resolution to such an intractable problem – it could lead to the removal of sanctions on Iran and the return of Iranian oil to the global market. Iran could probably ramp up production by an additional several hundred thousand barrels per day over the course of a few months with the potential to ultimately add around 1 million barrels per day. Still, if a deal is sealed in Switzerland, the oil markets will react immediately, most likely falling by several dollars per barrel. If the two sides fail to come together, that would be bullish for oil, although perhaps not quite as dramatically, since it would essentially continue the status quo regarding Iran over the last three years. Another possibility that is looking increasingly likely is that Iran and the West reach a rough outline of an accord, and
push off the thorniest issues until June when the final agreement must be reached. That would leave the oil markets in a status of limbo over the next three months regarding Iranian oil.

Speaking of a flood of oil, the Energy Information Administration
released new data that showed that the growth in oil production in the U.S. in 2014 was the highest in over 100 years. The United States has long been an oil producer – dating back to the 19th century. It was even the world’s largest oil producer in the early 20th century. By the 1970’s however, its vast oil fields appeared to be tapped out, and production went into decline. We have all read about how new drilling techniques have unlocked shale oil, but for drillers to be able to ramp up production to such a degree in a very oil-mature country is impressive. Last year, the U.S. added 1.2 million barrels per day to its output, the largest production gain since record-keeping began in 1900.

But the next chapter is uncertain. Low oil prices are forcing big-time cutbacks. The question is where oil prices go next. The looming oil storage “crisis” threatens to crush oil prices much further. However, the worst may be avoided as U.S. consumers and refiners pick up the slack. In fact, refiners churned through 15.5 million barrels per day in mid-March,
a record for the time of year when many units are taken offline for maintenance. With unusually large margins right now, refiners are taking advantage and buying up oil, paying enough to keep some oil out of storage. Refining demand is now stronger than expected, and that may divert oil away from storage in Cushing Oklahoma, as refiners pull oil down to the Gulf Coast. It is not just because refining margins have improved, but also because U.S. drivers are hitting the roadways, pushed on by low gasoline prices. Gasoline demand in the U.S. jumped by 6 percent in January, the largest surge in demand in over 20 years. If that keeps up, oil markets may find an equilibrium not just through supply rebalancing – which is where market analysts have kept most of their attention – but also through a pickup in demand.


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