Unprecedented pain

Iran says it has no plans to freeze oil exports, causing weakness in the price of oil at the start of the week.

Reuters quoted the Iranian Deputy Oil Minister Rokneddin Javadils as saying, "Under the present circumstances, the government and the Oil Ministry have not issued any policy or plan to the National Iranian Oil Company (NIOC) towards halting the increase in the production and exports of oil.”

Of course present circumstances can change and the OPEC meeting is not until June 2. This could be the Iranians talking tough ahead of the meeting in order to cut a better deal with the Saudis. Saudi Arabia has not endeared themself to the rest of the OPEC cartel, in part because the price war has caused unprecedented pain throughout the entire cartel, but also after backing out of a freeze deal at the Doha meeting.

The Iranians must think they are in a better position to negotiate as they have made some significant strides in regaining market share and the Saudi Arabian economy is crashing. Iran exports will soon be exceeding 2.0 million barrels of oil a day and the Iranians, after suffering under sanctions, won’t want to give that up. 

The oil market is also feeling some pressure this morning from reports of the return of Libyan exports. On Friday, oil sold off after it was reported that the first tanker of oil left port in the aftermath of a new deal signed between the Libyan government and the rebels. Libya's state-owned National Oil Company said that a 660,000-barrel cargo had been exported from a disputed terminal in the east of the country, raising hopes that with the help of the United Nations we could see the resumption of Libyan oil (at least for now).

This may take away some of the sting from the ongoing loss of Nigerian oil from the market that is still seeing production near a 20-year low. It is hard to see in the short term a scenario where Nigeria becomes stable. Nigerian President Muhammadu Buhari has vowed that he would crush the militants.

Canadian oil supply may start to come back, but we will start to see the impact in U.S. inventories this week and more than likely the next couple of weeks. The slow pipeline means we will just start to see the drop as U.S. refiners ramp up. The Wall Street Journal reported that on Friday, Canadian officials lifted the mandatory evacuation order that had been placed on some production sites in Canada’s wildfire-ravaged province of Alberta.

That allowed Suncor Energy Inc. and its Syncrude subsidiary to reopen two major oil-sands production complexes that had been shut down for over two weeks. The closure of these sites alone had pushed Canada’s crude production down by around one million barrels a day, according to the Journal.

Oil also saw the U.S. oil rig count hold steady, but natural gas rigs fell by two. That raised some hope that falling U.S. oil production may stop falling soon. Don’t bet on it.

Gas demand in the U.S. is soaring and Trilby Lundberg, the "Princess of petroleum," says that prices are higher. She says that the average price of gasoline has gone up by five cents over the past two weeks to $2.32 a gallon for regular grade. According to Trilby the price at the pump has risen 55 cents since late February. The highest average price of regular gasoline was $2.85 per gallon in San Francisco. The lowest was $1.98 in Tucson, Arizona. The U.S. average diesel price is $2.32 per gallon, up 4 cents from two weeks ago.

Despite the near-term weakness in oil, we feel that the longer term up move is far from over. We continue to see more oil producers file bankruptcies and the historic pullback in investment will do long term damage to future production prospects.