Direct Attacks on Iran Increase The Likelihood of Oil Upsets

January 3, 2020
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If the U.S.-Iran tensions don’t simmer down, prices could remain elevated as the market worries about supply disruptions. However, if it proves to be a short-term risk, producers will look back on this as a missed opportunity for improved pricing. 

AEGIS clients have been very active in trading today, locking in higher pricing for 2020, but also the back of the curve through 2023 as it was elevated this morning. 

  • The oil markets (and other markets) are tense today after the reported killing of Iranian general Soleimani in Iraq.
  • No oil infrastructure was directly endangered by the events overnight.
  • However, the tensions between Iran, the U.S., and Saudi Arabia have recently resulted in attacks and threats on oil and transportation, the most effective being September’s attacks on Saudi Arabia’s oil processing facilities. Iran was blamed by several countries, including the U.S., for that attack.
  • Therefore, the recent mob at the U.S. embassy in Iraq, and the killing of the Iranian general create nervousness around what may happen to Middle East oil supply.
  • The crude oil forward curves were already steeply backwardated (i.e. downward sloping, with a large premium for near-term delivery, and implied tightness in the next several months), and the recent U.S./Iran events serve to further threaten supply.
  • Due to OPEC voluntary supply cuts, spare capacity remains ample, but within close proximity to Iran in the Middle East. The extra supply that OPEC could produce would ordinarily dampen the bullish effect of potential supply outages, but the source of most of the OPEC spare capacity comes from Saudi Arabia, who is implicitly in the current conflict.

Questions? AEGIS View – Need to trade, or get indications? AEGIS Engage 

Facts:

  • The United States killed top Iranian general Qasem Soleimani, regarded as the second-most powerful figure in Iran.
  • This retaliation marks the latest escalation in violent Middle East conflicts that have been ongoing since the summer.
  • Soleimani led the foreign wing of Iran’s Islamic Revolutionary Guard Corps.
  • Iran’s supreme leader, Ayatollah Ali Khamenei, warned that a “hard revenge awaits criminals [enemies].”

Market moves:

  • Opportunities have opened up for clients to add additional protection.
  • Most of the price move higher is concentrated through September ’21.
  • Cal ’20 has seen most of the benefit.
  • The front of the curve is up almost 4%
  • Cal ’20 is up 2.8%
  • Cal ’21 is up 1.36%
  • Cal ’22 is up 0.5% —

— around 10:00 CT, Jan 3

More:

  • OPEC spare capacity has been increased over the past few years as the group has intentionally cut supply to raise price.
  • Saudi Arabia claims a capacity of about 12 MMBbl/d while only producing ~9.8 MMBbl/d.
  • While OPEC, mainly Saudi Arabia, has the ability to increase production if needed, capacity resides in the Middle East where Iran has caused trouble in the past.
  • Iranian retaliation is a real threat and the nation has targeted oil infrastructure and tanker vessels in the recent past.
  • Sanctions have reduced Iran’s ability to export and produce oil and gives them less to lose when weighing retaliatory action.

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