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In a report sent to Rigzone late Tuesday, analysts at Standard Chartered said they think there is currently no significant geopolitical premium in oil prices.
“The price response to the escalation in the Middle East violence has so far been modest and caused, in our view, by short covering by some of the more extreme market bears who now think that the potential for an extreme price downside is more limited,” the analysts stated in the report.
“However, we believe prices are likely to respond to further escalation more significantly,” they added.
In the report, the Standard Chartered analysts noted that the main market concern is likely to be Iranian output.
“The U.S. policy debate about Iranian oil exports is likely to become a key factor for oil market sentiment,” the analysts said in the report, which included a chart showing Iranian oil output from 2010 to 2023.
“The five main turning points since 2010 all associated with changes in U.S. policy,” the analysts noted in the report.
“The decision towards the end of the first Obama administration to link trade policy to imports of Iranian oil by key consuming countries reduced Iran’s output by over one million barrels per day,” they added.
“Constraints were eased after the signing of the Joint Comprehensive Plan of Action (JCPOA) in 2015. Constraints tightened again after the U.S. withdrawal from the JCPOA during the Trump administration, with output falling below two million barrels per day in 2020 when waivers given to consuming countries were withdrawn,” they continued.
“Output increased at the start of the current administration before rising further to three million barrels per day during 2023,” they went on to state.
The analysts said in the report that Iran’s output is higher year on year by just over 0.5 million barrels per day, “almost all of which appears to have been exported to China’s independent refiners”.
They added that the U.S. appears to have three broad policy options in relation to Iran’s oil output.
“One, the status quo, with output at three million barrels per day or higher, two, the pre-2023 plateau of close to 2.5 million barrels per day, or three, near-zero exports with output below two million barrels per day as reached at the end of the Trump administration,” the Standard Charted analysts said in the report.
“A week ago, one was the most expedient policy for the U.S. in terms of both market influence and geopolitics,” they added.
“We think the key question now is the extent that further developments in the Middle East bring two and three back into focus as potential policy targets,” they went on to note.
Hamas Attacks
In the report, Standard Chartered analysts said the most immediate energy market implication of the attacks by Hamas has been for gas rather than oil.
“The precautionary closure of Israel’s Tamar gas field cuts Israel’s domestic output by about 28 million cubic meters per day,” they noted.
“While exports from Israel to Egypt usually come from the Leviathan field, the Tamar outage is likely to have knock-on effects, with early indications suggesting that exports have been reduced by about five million cubic meters per day from the usual 23 million cubic meters per day,” they added.
“Theoretically, the reduction of exports to Egypt could have implications for European markets as it reduces the likelihood of Egypt loading LNG cargoes, as has been pointed out by the International Energy Agency (IEA),” they continued.
“However, we think those fears are somewhat overblown as the number of cargoes at risk is small, if not zero. Egypt’s domestic demand has been so strong that no cargoes were exported in September,” they said.
The analysts stated in the report that the current geopolitical situation and associated headline risk means that any form of short-term forecasting is fraught with hazard.
“With that proviso firmly attached, from a fundamental perspective due to the continuing overall supply deficit, we expect Brent to regain $90 per barrel swiftly, reversing last week’s positioning-led undershoot in prices,” they said in the report.
“However, SCORPIO, our machine-learning short-term forecasting model, implies that the adjustment could yet have longer to run and is forecasting a week on week fall of $2.48 per barrel, caused primarily by speculative positioning (-$1.42 per barrel),” they added.
Bearish Despite Middle East Events
In an oil and gas report sent to Rigzone on Tuesday, Macquarie strategists said they remain bearish despite Middle East events.
“We remain bearish on price but acknowledge upside risk associated with the current conflict in the Middle East,” the strategists said in the report.
“In our assessment, the Biden administration’s policy approach has been to limit oil supply disruptions, regardless of the situation. Given that policy objectives did not target Russian oil flows even at the height of the Russia-Ukraine conflict, we do not expect Iranian oil exports to be constrained either,” they added.
“As a result, we anticipate 4Q23/1Q24 price correction due to sweet production growth in the U.S., North Sea, and Brazil, in addition to waning OPEC+ compliance, which may have started in September,” the strategists continued.
In the report, the Macquarie strategists highlighted that WTI increased net length as Brent decreased over the last week.
“WTI rose by 1.4K and Brent fell by 10.6K. Over the past two weeks, Brent managed money net length decreased by 41K contracts as WTI grew by 10K,” the strategists noted.
“WTI speculator length maintained its upward trajectory as the decrease in shorts barely exceeded the drop in longs. Brent net length demonstrated a larger move with almost double the amount of selling as covering,” they added.
“Over the past two weeks, Brent commercial length increased by 67.4K contracts after falling by 30.2K contacts the two weeks prior, potentially demonstrating increased refiner hedging as margins fall,” they continued.
To contact the author, email andreas.exarheas@rigzone.com
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