Market Currents: The growing prominence of Iranian oil exports

One hundred and thirty-three years after the Brooklyn Bridge was opened to traffic, and crude is trying to navigate troubled water once again. Choppiness today comes courtesy of a stronger US dollar and ongoing oversupply fears, while the prospect of a crude inventory draw from tomorrow’s EIA report looms. Hark, here are five things to consider in oil markets today:

1) Germany has been leading the charge on the economic data front today; an update to Q1 GDP has seen no revision to prior prints – +0.7% QoQ, +1.3% YoY. We have also had economic sentiment data out via the ZEW; current conditions for Germany were better than expected, while 6-month outlooks for both Germany and the Eurozone have deteriorated.

In contrast, U.S. home sales are full of the joys of spring, rising 16.6% last month – the biggest jump in three years.

2) All eight of France’s refineries are now seeing strikes in response to a government labor law, with output expected to fall by at least 50%.  An estimated 20% of gas stations have either run dry or are low on supplies, as deliveries run low and panic buying increases.

3) The Korea National Oil Corporation has reported today that it received 237,000 barrels per day of Iranian oil imports in April, double the volume compared to year-ago levels. We see the same volume arriving last month in our ClipperData, as well as Iranian crude exports building a head of steam elsewhere.

In fact, volumes to both South Korea and China have been increasing rapidly in recent months. Our ClipperData show arrivals so far in May are at a pace of 1.1mn bpd to the two countries, nearly 60% higher than year-ago levels:

ClipperData Iran to China and South Korea4) Following on from the nutty Iranian oil export ramp-up above, the below graphic is pilfered from the WSJ today, highlighting how OPEC’s spare capacity is set to be at its lowest level since 2008. It is expected to drop by over 20% in the current quarter to 1.25mn bpd in Q3, due to production cut outages led by Nigeria and Libya.

As spare capacity dwindles, the threat of a price spike increases, especially given the potential for a geopolitical event materially impacting global oil production. All the while, non-OPEC production should continue to fall through the duration of the year, gradually erasing the supply overhang and further tightening up crude fundamentals.

OPEC spare capacity

5) Finally, the chart below illustrates how the rally in crude prices so far this year has helped to unwind much of the premium on high-yielding energy bonds. As oil has rallied, bankruptcy fears have evaporated, and buyers have jumped back into energy junk bonds:

high yield energy bonds

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