Iran deal is not why oil prices are falling: Analyst
A deal with Iran is often cited as the cause for oil’s (CLQ15.NYM) declines to 3-month lows. But one analyst maintains there is another reason why crude is trading in the low $50s.
Oil has plummeted 13% since late June but that has little to do with talks in Geneva, according to Pavel Molchanov, energy analyst at Raymond James. He called negotiations with Iran are a “non-event” for crude prices.
“We’ve known exactly what the Iranian deal will look like since March 30,” Molchanov said. “We’ve known for the last 90 days that once the deal is in place and once Iranian compliance is certified, the European Union is going to lift the oil embargo and that will enable Iran to increase its oil exports.”
He estimated that the deal could increase Iran’s oil production by 500,000 barrels per day, though others estimate it will add 1 million barrels. “Not a game-changer at all for the global oil market,” said Molchanov.
The country currently produces between 2.8 million and 3.1 million barrels per day, according to OPEC. That puts Iran’s current output at under 10% of the cartel’s total daily production.
Molchanov also dismissed the downturn in China’s stock market as a reason why oil prices have fallen. From June 12 to July 3, the Shanghai Composite index (000001.SS) dropped 29% but has rebounded a little bit in the past few days.
“We’ve known that Chinese oil demand has been relatively slow, growing 2%, maybe 3%, a year,” Molchanov said.
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Instead, a country with no petroleum and relatively small impact on global energy consumption may be driving down oil prices.
“The biggest hurdle for oil over the last two weeks has been Greece and more specifically, the pressure on the euro relating to the Greek crisis,” Molchanov said. ”Anything that is bearish for the euro pushes up the dollar and anything that pushes up the dollar tends to correlate negatively with oil prices. That’s just the nature of the commodity-currency relationship.”
The price of the euro relative to the U.S. dollar dropped 3% since June 19 and on Tuesday tested $1.10.
But Molchanov expects a slight rebound ahead in crude prices, though nowhere as high as it was a year ago when it traded above $105 per barrel. He forecasts a modest average price increase to $65 per barrel next year.
“Oil prices have to move higher in 2016 to support a more sustainable level of investment in the industry,” he said. “For the past 6-plus months, the entire oil and gas value chain has been mired in what I like to call ‘austerity on steroids’ – extreme levels of spending cuts, layoffs, projects getting canceled or delayed. There are entire governments like Russia and Venezuela getting into trouble. Eventually, that austerity will have to be alleviated.”
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