Oil: Talk of 'Hidden' Iranian barrels, demand worries preventing jump higher - TDS

Bart Melek, head of commodity strategy at TD Securities, suggests that fears that weak demand will negate OPEC+ cuts, speculation that millions of Iranians barrels are about to hit the market and outsized US inventories have depressed crude oil prices recently.

Key Quotes

“This has occurred despite numerous escalations of tensions between the west and Iran in the Strait of Hormuz. WTI prices have fallen into $55/b territory last week, near levels which could well drive trend following CTAs to aggressively build additional short exposure.”

“Weak economic data in China and around the world has some observers believing that demand may drop by as much as 400,000 b/d next year, which could well drive the market into a surplus again and force prices lower. More immediately, as many as ten very-large crude carriers and two smaller tankers owned by the state-run National Iranian Oil Company are believed to be sailing toward or idling in Chinese ports. These vessels can carry some 20 million bbls combined, and have not been cleared by Chinese costumes.”

“Once this crude lands, it is likely that future Chinese imports would drop for a while, applying significant downward pressure on prices. This to some extent explains the recent price drop to support levels. The reason that crude is maintaining the current price is the rising tensions in the Middle East, particularly the Strait of Hormuz which is the most important global choke point which could cause a massive shortage.”

“The risk premium has gone up after Iran seized two UK-linked tankers in the area. The good news is that UK and Iran are de-escalating, but it could also mean that the pure fundamentals may take over, sending prices below $55/b and trigger CTA selling.”

“We judge that there is little appetite for a shooting war at this stage, but we also believe that tensions and the risk premium will remain, preventing a rout. We also see demand to remain firmer than many expect, and continue to see modest upside as the summer unfolds and US inventories fall.”