Monday, 18 January 2016

Iran: poorly timed gamble could be oil market bottom?

S
o President Obama, keen to look to his legacy, has agreed to the deal with Iran that sees it freed of nearly all sanctions and able to trade again.

That Obama's Foreign policy strategic ineptness is the biggest legacy of his Presidency, perhaps we should be worried...

Certainly timing wise this is a very bad moment for what has been years of negotiations to suddenly bear fruit.

From the perspective of Saudi Arabia, rapidly moving from key Western Ally to pariah state, it is a disaster. Saudi is spending lots of money fighting proxy wars with Iran across the region. The $100 billion stimulus to Iran is not welcome. Saudi and America are no longer friends and the tension between Saudi and Iran could get worse.

Furthermore, the oil price is under the worst pressure this century already. Iran is happy to pile in given it has been selling oil illicitly at huge discounts, not it can sell it openly with lesser discounts - so what about the price will be their feeling. Iran can add another 500,000 BOE per day easily in the next twelve months.

This last point has pushed the price of oil down to $28 today, marking a spectacular fall for 2016 already and we are only 2 weeks in. However, this downward pressure could be the last push to really crater the oil price. From here on in US Shale explorers are going to start going under, the Banks will have to foreclose on assets across the world and future investments will be stopped dead. All the while global demand for oil is still growing, even China imported 6% more oil last year.

At some point the market will call a bottom to the price, not that there will be an instant snap back, but always a  good time to buy. This bottom is now likely to be in Q1 2016 I think.

Another wider issue for the world, is how come it will be sensible for the rest of the world to close down production and leave the only production centre in the dangerous Middle East, how will renewables ever survive and finally, how does cheap oil fight the 'climate change' war. All these 3 points will be covered at Davos and all lead to a world where somewhat higher oil prices will be welcome.

Also, I would not rule out a Saudi/Iranian contretemps in the Gulf, even if it is limited, it will handily but a firm end to the ever falling price of the commodity both economies survive on.

38 comments:

Steven_L said...

So what is your strategy for catching this falling knife? Buy majors? Buy minors? Buy futures? Buy out of the money call options?

Nick Drew said...

Hard to exaggerate how pivotal is Iran. And, as I keep saying, just look where Qatar is!

Anonymous said...

Closer to home, how will GO cope with the effects of declining fuel tax revenues. Our local county council is struggling with declining business rates (e.g. Tata to the rates from the steel companies) and a drop in Central government funding of £100mn or more.

They have come up with the great idea of cutting frontline services but preserving those at County Hall as they need them to supervise declining or non-extant outsourcing contracts.

We have the politicians we deserve. And so to does Iran it would appear.

If we shot them all, would anyone notice.

CityUnslicker said...

SL - ETF's for this one will be my choice, Long oil around 20-25 depending how the next couple of weeks goes.

the definite buy signal will be the 'incident' in the straits of hormuz when it comes to pass.

BE said...

Maybe I am reading something that isn't there, CU, but you almost seem disappointed that the Saudis are being downgraded. I never understood why Iran was a pariah and Saudi not. If anything, Iran is the more civilised society (note, not making and judgement about govermments as such).

And why is it so awful to have this extra oil floating about?

And why would cheap oil now stop the US and others producing more expensive oil when the price goes back up? Widespread solar et al. might be delayed by cheaper oil, but we aren't going to suddenly forget all the technology.

I see all of this as a bit of a win for the developed world.

I will be continuing to buy into my regular investment schemes in the hope that equities get a lot cheaper in the short term and more expensive over the longer term.

Finally, perhaps if we are so confident of the price spiking due to an all-out war between Iran/Saudi/Iraq/Kuwait/Qatar/Yemen then why not buy a boatful of crude and keep it moored on in Kent somewhere?

Steven_L said...

why not buy a boatful of crude and keep it moored on in Kent somewhere?

I'm up for this. any chance you can send me your share via Western Union?

CityUnslicker said...

BE - I am quite happy to see the Saudi's ignored a bit becuase they sarted both ISIS and Al-Qaeda. However, a Libya style collapse in Saudi would be a bad thing, as that would be to happen to any country.

A lot of the West digs for oil too, go see how things are in Aberdeen, or UK dreams of fracking, all toast - the West loses economic growth as much as it benefits from the cheapness of oil. Overall, cheap oil is a GOOD thing, but there are still consequences.

Finally, why buy a boat when you can just buy forward spot price or ETF's - no need to own the physical. Ship rates are sky high at the moment as you are not the first person to have this idea.

Demetrius said...

I remember October 1973. We thought then that we could be in for long term petrol rationing.

Steven_L said...

Those ETF's tend to roll over futures contracts 12 times a year don't they? How much does that cost?

Whereas you go long a major and they might even pay you dividends while the value of their underlying assets go up?

James Higham said...

The question is whether one can avoid them or their moves force us to take note. I'm watching Russia at this time.

BE said...

CU do you not agree with the theory of comparative advantage? If it costs $2 to get a barrel out of the ground in Iran, why on Earth would we want to spend $80 getting one out of Lancashire?

Or maybe you agree with Jezza that nuclear-free subs are a great job-creation scheme?

Electro-Kevin said...

Pardon my ignorance.

Does oil have a shelf life ? And if not - then why not buy it when it's cheap and stockpile the stuff ?

Thud said...

I'm happy to keep buying RDS,Conoco and Chevron.Dividends are decent and likely to remain so in the medium term so I'll just watch the news and keep plugging away.

BE said...

'Cause it costs to keep hold of it. Lots of people are stockpiling it. Just not me, as I don't have a shed.

Nick Drew said...

Kev - nope, oil does not have a shelf-life, it's been there for many millions of years and it ain't deteriorating any time soon

(unless it's a specific light grade of, e.g. gasoline, in which case if you leave it in the open the lighter bits will evaporate, leaving you with something that wouldn't be gasoline after a while)

CityUnslicker said...

BE - there is a balance to be had i would imagine. Buying all our oil from Jihhadist states probably something worth paying for I would posit. Quite the opposite of Corbyn.

Not that it will matter, our politicians react very very slowly to world changes, by the time they do, things have often moved on.

SL- ETF's do roll but equally you can get 300% upside for 100% real-world games. Need to keep an eye on them though....

Electro-Kevin said...

Nick - That part of my question was rhetorical but stoopidly put.

Nick Drew said...

sorry Kev I was in didactic mode, my rush to be *helpful* and I end up insulting you to your face!

Electro-Kevin said...

Apology accepted.

Otherwise I was going to challenge you to a duel !

(I've been watching too much War and Peace.)

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