Oil markets surge in wake of Iran killing; eyeing the scenarios going forward

Meanwhile, ULSD ended November at $1.8789/ga and has now added roughly 18 cts/g. 

What is there for the oil market to be concerned about? It’s understandable that in the era of Twitter and other social media that there would be many scenarios flying as to why the price of oil would climb. One part of the equation is that when tensions rise in the Middle East, oil goes up. 

But in the case of any Iranian-U.S. conflict set off by the killing of  Soleimani, there are other scenarios that could have an impact on oil supplies. 

• One area that is less significant than in the past is the possible loss of Iranian production. Due to the reimposition of U.S. economic sanctions that have greatly hindered the sale of Iranian oil in the U.S. market, Iranian production has dropped from 3.8 million b/d in the middle of 2019 to 2.15 million b/d at present, according to S&P Global Platts. Exports are now measured in a few hundred thousand barrels per day. If the Iran-U.S. conflict escalates and drone or other military attacks are launched at Iranian oil facilities, the reality is that sanctions have taken many barrels of Iranian supply off the market already. 

• Does Donald Trump want higher oil prices going into a reelection campaign? Presidents always get blamed for higher oil prices. Just ask Jimmy Carter.

• Given that the killing of Soleimani was on Iraqi soil, a loss of oil production there would be far more significant than anything that would happen across the border in Iran. Iraq’s most recent production level was 4.64 million b/d, according to Platts. It had been vowing to cut that production to get down toward its OPEC quota. ExxonMobil operates the giant West Qurna oilfield in Iraq, with production of more than 465,000 b/d. The fear is that given that ExxonMobil is a U.S. company, its operations could be a target for Iranian attacks. U.S. citizens in Iraq have been urged by the U.S. Embassy to leave the country, but the Iraqi energy ministry is reported to have said operations at West Qurna have not been affected.

• The U.S. is in the process of making some sales of oil out of its Strategic Petroleum Reserve because it is “overfunded” given the rise in U.S. output and its plummeting position as a net importer. Additional SPR supplies could be authorized to replace lost oil production out of Iran, if it comes to that, and other members of the consumer-led International Energy Agency could do the same, as was done in 2011 soon after the Libyan government of Moammar Khadafy began to implode. But would the governments of the IEA authorize such a release if they do not agree with U.S. strategy relative to Iran?

• OPEC has slashed as much as 3 million b/d from its high-water production levels of fall 2018, far more than its plans call for. It widened that projected cut at its early December meeting but the cuts in place, mostly through Saudi Arabia, already were in excess of that as well. Saudi Arabia could restore significant amounts of its reduced production to make up for any lost Iranian output.

• One small factor: The U.S dollar overnight rose sharply. A rising dollar works to push down oil prices. 

• The reaction of the U.S. shale industry to higher prices will be significant. The North American rig count is up, suggesting that some companies already have started to take advantage of higher prices by launching new activity. This rise in price could also be seen as an opportunity by companies to hedge future production at these levels, with its sales of future oil supplies working to push down prices.