It’s a true tell of the state of the markets, when a tired old story sends oil rocketing about 10% higher in price
In this case, that “tired old story” is Venezuela calling for an emergency meeting of OPEC and Russia.
Venezuela has a habit of calling for such meetings because its leftist government thinks oil should never sell below $100 per barrel.
The market reaction tells me that the oil price has further to decline. Too many people are still too anxious to jump aboard the oil train before it leaves the station for the land of higher prices.
And why exactly do I believe the price of oil will further decline? In a word: Iran.
Get Ready for a Flood of Iranian Oil
Economic sanctions have been lifted from Iran and its oil is starting to flow to ports across the globe.
Iranian oil exports are set to rise by a fifth in January and February to roughly 1.5 million barrels per day. That’s a two-year high. Much of this oil is part of the 40 million barrels of oil Iran had floating in its fleet of oil tankers.
What the market should worry about is the amount of new oil Iran will be pumping out of the ground very soon. Let’s recall that Iran’s readily accessible oil reserves are second in the region to Saudi Arabia.
Iran issued some soothing sounds recently about not rocking the oil boat with too much more production. But why would Iran not want to rock the boat of both the U.S. and Saudi Arabia?
It was just last September that Iranian oil minister Bijan Zangeneh said, “The drop in prices won’t be a concern for us. It should be a concern for those who have replaced Iran’s [market share].” Even just before the New Year, Zangeneh reiterated that Iran would cut prices in order to regain market share.
Iranian Oil – Dirt Cheap
Were the Iranian oil minister’s words just hyperbole, or is Iran really unconcerned by the current price of oil?
I’m leaning toward the view that Iran is more concerned about market share than price.
Iran can handle low oil prices better than anyone else. According to Moody’s, years of economic sanctions have forced Iran to adapt to lower oil revenues.
Another reason the country is likely chiefly concerned with market share is that the production cost of oil in Iran is… well, dirt-cheap.
The CEO of the Iranian Central Oil Fields Company, Salbali Karimi, says that oil from the central regions of the country can be produced at a mere $1 to $1.50 per barrel!
That’s likely an exaggeration, but not much of one. Back in 2008, under sanctions, the International Monetary Fund said Iran was producing oil for about $5 per barrel. And that was with using outdated equipment.
At worst, Iran and Saudi Arabia can produce oil for something in the $10 per barrel range, according to energy consultancy Rystad Energy. Even in Iraq, production costs are less than $11 per barrel.
In comparison, Rystad estimates production costs in the United States are about $36 per barrel.
What It Means for the Oil Price
I firmly believe Iran will increase oil output by 500,000 barrels per day almost immediately and by another 500,000 barrels per day by the end of the year.
That, according to the IMF, will drop oil prices by a further $5 to $15 per barrel.
The price of oil, of course, will eventually rebound. But those in a hurry to board the oil train seem to forget there’s an overhang on the market of at least three billion barrels (according to the International Energy Agency).
That would take at least six months to work off even if economic activity picks up.
Then there’s the oil just waiting to come onstream from the U.S. shale drillers that have stored it using the fracklog technique.
I would let this particular oil train pass you by. There will be another one soon enough, and at a lower price.
That’s just what oil legend T. Boone Pickens is doing.
In an interview with Bloomberg, Pickens said he sold all of his oil holdings and is waiting for a better time to get in. Makes sense to me.
Good investing,