Oil Continues To Rebound On U.S. – Iran Tensions

Oil Video 23.04.20.

U.S. Iran Tensions Support Short-Term Bullish Sentiment But Are Unlikely To Impact Physical Oil Market

Oil prices continue to recover the losses incurred on Tuesday as U.S. and Iran traded threats. U.S. President Donald Trump stated that any Iranian gunboats that harrassed U.S. ships would be destroyed. In turn, Iran stated that if U.S. ships threaten Iran’s safety, Iranian military would attack them.

At the beginning of this year, U.S. and Iran were close to a real conflict, and WTI oil traded above $60 per barrel. Today, the elimination of Iranian oil exports won’t change much for the physical oil market in the near term since the gap between supply and demand is just too big.

The market needs a material increase in oil demand, and nothing can substitute this ultra-important catalyst. In addition, it looks like the comments from the U.S. and Iran are used as an “excuse” to initiate speculative positions in oil which has declined too far too fast due to market panic.

At this point, oil prices seem ready to go back to pre-panic levels near $20. After this, traders and investors will try to evaluate the future oil storage situation in June.

It is obvious that the market will be in deep imbalance in May, but the supply/demand balance in June depends on a number of catalysts including the duration of lockdown measures, which is currently unknown.

The Decline Of U.S. Production Is The Only Real Solution To The U.S. Storage Problem

As per the U.S. Energy Information Administration, the country’s oil production peaked at 13.1 million barrels per day (bpd) just before coronavirus hit the U.S. The latest weekly report showed that production declined to 12.2 million bpd.

It is clear that more production cuts are needed to improve the situation on the storage front. The U.S. cannot participate in coordinated production cuts due to anti-trust laws and also because so many independent oil companies are producing oil.

However, the U.S. oil production will continue to trend down in a natural way as challenged producers shut uneconomic wells. I’d argue that production levels shown in the following EIA weekly reports are just as important for market sentiment as inventory levels.

Inventories are going to rise because of the impact of virus containment measures, but the speed at which producers will react to lower prices is a major unknown catalyst. A rapid decrease in U.S. production could provide some much-needed support to WTI prices.