The overnight session was very quiet, compared to recent sessions, with most markets within a very small percentage of unchanged. It feels as if the market has taken a bit of a sigh of relief and paused, as all the urgency of the issues from the past two weeks subsides. Iran is agreed upon, yet people may not have realized that this is not a significant change in sentiment from the price discovery of energy markets, at least not for 6 months to a year. Greece has come to an agreement, and even gotten emergency relief from the ECB to re-open banks. China has remained in the positive for several days now, after inserting some harsh equity trading rules geared toward staving off a crash.
Now that the crises are over, we can return to the fundamentals of given markets. However, there is little in the way of fundamentals currently weighing on the price discovery that are not already priced in. The effort can be focused on deciding what fundamental development has had an overzealous effect on the price discovery, most likely something rooted more in speculation than in fact. It would appear to me the story that fits that narrative could be the Iran deal. The crude seemingly sold off more largely based on demand fears from China and Greece, with the supply side bearishness only trading around the fringe of the selloff. However, now that we have come to the other side of those issues (see the equity markets recovery for evidence), it would seem logical that we would revisit some semblance of a rally in crude in a corrective move. The Iran deal was struck just as the clouds were starting to part over Greece, and has become the key fundamental bear influence in the energies. The question is, does this drop in price adequately price in the possible additional fuel coming to market? The short answer is that it probably way over prices in that extra brent crude for two reasons.
One, it is not a significant amount of fuel, particularly for 2015. With some 2 million barrels reportedly sitting in ships for six months already destined for foreign ports of call, the actual daily production will be far less than that for most of the next year. In fact, reports show that Iran's capacity will only be at about 10% of that, at 200,000 BPD, for the rest of 2015, most likely. That would indicate a significant under valuation if the crude contract is near 50 dollars due to this pact.
Two, and this has been touched on in previous newsletters, the Saudis are significantly ramping up their refining capacity, meaning that the export numbers for crude coming out of Saudi Arabia will be less, as they keep more raw material within their borders and refine products for export. It would seem that would leave some room for the Iranian brent to seamlessly fit in the 93 million barrels of consumption currently being used per day globally.
Therefore, we can most likely look for a rally in the crude that could be offset at some point by a flatness in the refined products, as we start to see more diesel, gasoline and jet fuel coming directly out of the middle east.
Natural gas resumed its steady climb over night, shrugging off another very slight bearish supply report. Potentially, we could see the weather start to manifest itself into the price discovery, possibly producing the rally we have been looking for, as the coming week looks to be sharply above average temperatures across the country.