4:45 AM
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It won’t come as a shock to seasoned oil watchers that Goldman
Sachs remains bullish on oil. Contrary to conventional opinion that
international prices will fall to $80-90/b into 2013, the investment
bank sees things differently. $130/b here we come in for a tumultuous
2013. In itself, that’s hardly newsworthy stuff, but what makes
Goldman’s call far more interesting is that it’s entirely based around
exacerbation of the Iranian question.
As much as Iran currently appears to be under the cosh, the U.S. needs to have a very serious think about what it’s going to do with Tehran after November 2012 – not unless we’re supposed to live with a structural Iranian price premium over the next few years, all without any meaningful shift in Iran’s nuclear posture.
Understandable Drift
Policy drift on Iran is understandable as far as U.S. elections are concerned. Nobody wants to push the Iranian envelope too far now and risk upsetting American voters at domestic ballot boxes by causing an uptick on gasoline prices. But the problem is that the market has no idea where Washington really wants (or indeed realistically can) go with the Iranian question into 2013. Even seasoned oil hands such as Lord Browne (ex BP CEO), were struggling to come up with any convincing answers at a recent Chatham House event in the heart of London. Drift yes, but for how long, who knows?
What adds to the ‘drift narrative’ is the growing belief that sanctions are already working. Alas, that purely depends on what you think sanctions are for? Stopping the nuclear clock counting down in Iran, or putting pressure on the Iranian economy? If it’s the latter, then you’re onto a good thing. Iranian oil exports have taken a significant hit, clipping overall output to a 23 year low of 2.63mb/d in September. More importantly, it’s halved exports to under 1mb/d. That’s had a major effect on the Iranian economy, reducing oil receipts to around $20bn in the last quarter, marking a 60% overall fall on last year’s figures. Foreign reserves have fallen to little more than $150bn, with repatriation of oil revenues becoming increasingly hard without access to the U.S. financial sector. Iran is already accepting (delayed and heavily discounted) payments in Chinese yuan and Indian rupee; the riyal has dived 30% against the dollar in the past few weeks. Long gone are the days when Iran could paper over the cracks by using oil receipts to stabilise the exchange rate. Inflation is concurrently running above 30%, affecting anything from basic food stuffs to high end consumer goods. ‘Balance of payments crises’ might be putting things a bit too strongly, but these aren’t good times for Iran, any way you look at it.
The problem is as true as all that is, analysts are confusing ‘economic difficulty’ with ‘economic implosion’ in Iran. Outright collapse still remains an unlikely outcome (least of all from a falling riyal). Not only are the Iranians used to systemic economic mismanagement, the regime is still exporting sufficient oil to stay afloat in a $100/b price environment, and especially to Asian consumers. That’s more than enough for Tehran to keep paying off supporters of the regime across the military, bureaucracy and oil industry – a point that simply can’t be overlooked when assessing if sanctions are ever going to work in Iran. This isn’t about the ‘Tehran street’ but machinations in the ‘Iranian elite’. The idea that economic difficulty inexorably translates into political destabilisation is at best, circumstantial. Go one step further down that line and assume that it will prompt a shift in Iran’s nuclear posture, is even more farfetched. Enrichment isn’t seen as a party political issue to be trifled with, but as a vital national security interest deigned to enhance Iran’s regional position and international leverage.
What that means for Western sanctions, is that if we’re to keep going down this path to forge a political resolution of the nuclear question, then mere ‘economic difficulty’ is never going to be sufficient. The Iranian economy has to reach a ‘critical mass’ where Tehran accepts it has no viable option but to broker a negotiated settlement on enrichment or face total implosion. Right now we’re clearly not calibrating policy towards such ends – if anything Iranian oil exports are going to increase once new Asian contracts are signed and new legal loops found. This blunt reality directly underpins Goldman’s ‘pricing message’. Drift simply won’t do – not unless you want to live with the prospect of structurally higher oil prices without any discernible effect on Iran. Whoever wins the White House needs to get a grip on the nuclear question. What’s more, they need be brutally strategic in its logic and application to make any of this worthwhile. With that in mind, we’ve outlined two serious options linked to prevailing benchmarks that could play out over the next year (at the bottom and top end of the market). Both need to be considered, and both need to be tied to a crucial third diplomatic element to turn economic pressure into diplomatic outcomes. Are they all drastic? Yes. Will they be unpopular? Yes. But they might just help to shift the nuclear needle to avoid a far more drastic outcome that will inexorably play out otherwise; military strikes.
Scenario One: Iran Tighten Its Own Noose In A Low Price Environment
The first scenario assumes Goldman’s is overegging the Iranian omelette for now, and supply-demand fundamentals actually push prices towards $80/b or lower. That’s by no means beyond the realms of possibility given the supply overhang that’s built up over the past few months, or indeed systemic demand side problems in China, Europe and the U.S. It’s not like America can’t go for QE4; China doesn’t want to flood the market with cheap money second time round. Europe remains structurally incapable of resolving the Eurozone crisis.
However, if we find ourselves entering a lower price environment, the U.S. has to resist its overwhelming temptation to do what it’s done every time prices have softened so far; use it as an opportunity to increase pressure on Iran. They did so in July by going after the financial and shipping sectors, and have just leant on the EU to increase pressures ahead of American elections. That makes for good short term headlines, but all it really does is (re)create its own self-fulfilling sanctions premium, enabling Iran to keep coining sufficient returns to offset price against volume. The economically smart move is to go the other way in a low price environment, quietly loosen sanctions and let Iran dump as much oil on the market as they can to find the real price floor – a move that would almost certainly depress prices further. Rather than constraining Tehran to 1mb/d exports, it would be far easier to take the ‘Iranian premium’ out of the market at that stage, let them ratchet export figures up toward 1.5mb/d, sinking benchmark prices towards $60-70/b. The Iranians would be stupid enough to follow through on renewed exports to claim a short terms sanctions ‘victory’ over Washington, even if they they’d fall into a long term $60-70/b trap. For Iran, that would actually mean selling oil into its core Asian consumers at significantly lower benchmarks still.
And that’s the real prize to be won at the bottom of the market; let the Iranian’s tighten their own noose around their own necks. A $60-70/b outlook would rapidly bring Iran to the economic brink of collapse, a development that will be far more economically devastating than continually letting Tehran cash in on its own mark-up. Bottom line, making weak prices even slacker is one credible way of pushing Iran to the economic brink and towards the negotiating table.
Scenario Two: Push Prices Beyond Global Tolerance
If that sketches a serious option at the bottom of the market, then the second scenario is to consider what play to make if Goldman’s has made a good call, and prices continue on an upwards trajectory. In part that might be based on Iranian meddling, in part because of supply difficulties afflicting producer states, not to mention the outside chance that economic output could pick up faster than expected on the demand side, and especially so in Asia. But perhaps more importantly than anything into 2013, oil bulls are well aware that the geopolitical calendar is stacked in their favour. We have Israeli elections in January hyping Iranian attacks to whole new levels, followed by Presidential elections in Iran come June 2013. Both will weigh heavily on oil market sentiment, especially because the Strategic Petroleum Reserve becomes far less acute once U.S. elections are out the way next month. The threat of using the reserve has been one of the key reasons why Brent has kept below $120/b for traders wary of being burnt. Into 2013, the SPR ceiling no longer exists. The sky is the limit.
source: forbes.com
please give me comments thanks
As much as Iran currently appears to be under the cosh, the U.S. needs to have a very serious think about what it’s going to do with Tehran after November 2012 – not unless we’re supposed to live with a structural Iranian price premium over the next few years, all without any meaningful shift in Iran’s nuclear posture.
Understandable Drift
Policy drift on Iran is understandable as far as U.S. elections are concerned. Nobody wants to push the Iranian envelope too far now and risk upsetting American voters at domestic ballot boxes by causing an uptick on gasoline prices. But the problem is that the market has no idea where Washington really wants (or indeed realistically can) go with the Iranian question into 2013. Even seasoned oil hands such as Lord Browne (ex BP CEO), were struggling to come up with any convincing answers at a recent Chatham House event in the heart of London. Drift yes, but for how long, who knows?
What adds to the ‘drift narrative’ is the growing belief that sanctions are already working. Alas, that purely depends on what you think sanctions are for? Stopping the nuclear clock counting down in Iran, or putting pressure on the Iranian economy? If it’s the latter, then you’re onto a good thing. Iranian oil exports have taken a significant hit, clipping overall output to a 23 year low of 2.63mb/d in September. More importantly, it’s halved exports to under 1mb/d. That’s had a major effect on the Iranian economy, reducing oil receipts to around $20bn in the last quarter, marking a 60% overall fall on last year’s figures. Foreign reserves have fallen to little more than $150bn, with repatriation of oil revenues becoming increasingly hard without access to the U.S. financial sector. Iran is already accepting (delayed and heavily discounted) payments in Chinese yuan and Indian rupee; the riyal has dived 30% against the dollar in the past few weeks. Long gone are the days when Iran could paper over the cracks by using oil receipts to stabilise the exchange rate. Inflation is concurrently running above 30%, affecting anything from basic food stuffs to high end consumer goods. ‘Balance of payments crises’ might be putting things a bit too strongly, but these aren’t good times for Iran, any way you look at it.
The problem is as true as all that is, analysts are confusing ‘economic difficulty’ with ‘economic implosion’ in Iran. Outright collapse still remains an unlikely outcome (least of all from a falling riyal). Not only are the Iranians used to systemic economic mismanagement, the regime is still exporting sufficient oil to stay afloat in a $100/b price environment, and especially to Asian consumers. That’s more than enough for Tehran to keep paying off supporters of the regime across the military, bureaucracy and oil industry – a point that simply can’t be overlooked when assessing if sanctions are ever going to work in Iran. This isn’t about the ‘Tehran street’ but machinations in the ‘Iranian elite’. The idea that economic difficulty inexorably translates into political destabilisation is at best, circumstantial. Go one step further down that line and assume that it will prompt a shift in Iran’s nuclear posture, is even more farfetched. Enrichment isn’t seen as a party political issue to be trifled with, but as a vital national security interest deigned to enhance Iran’s regional position and international leverage.
What that means for Western sanctions, is that if we’re to keep going down this path to forge a political resolution of the nuclear question, then mere ‘economic difficulty’ is never going to be sufficient. The Iranian economy has to reach a ‘critical mass’ where Tehran accepts it has no viable option but to broker a negotiated settlement on enrichment or face total implosion. Right now we’re clearly not calibrating policy towards such ends – if anything Iranian oil exports are going to increase once new Asian contracts are signed and new legal loops found. This blunt reality directly underpins Goldman’s ‘pricing message’. Drift simply won’t do – not unless you want to live with the prospect of structurally higher oil prices without any discernible effect on Iran. Whoever wins the White House needs to get a grip on the nuclear question. What’s more, they need be brutally strategic in its logic and application to make any of this worthwhile. With that in mind, we’ve outlined two serious options linked to prevailing benchmarks that could play out over the next year (at the bottom and top end of the market). Both need to be considered, and both need to be tied to a crucial third diplomatic element to turn economic pressure into diplomatic outcomes. Are they all drastic? Yes. Will they be unpopular? Yes. But they might just help to shift the nuclear needle to avoid a far more drastic outcome that will inexorably play out otherwise; military strikes.
Scenario One: Iran Tighten Its Own Noose In A Low Price Environment
The first scenario assumes Goldman’s is overegging the Iranian omelette for now, and supply-demand fundamentals actually push prices towards $80/b or lower. That’s by no means beyond the realms of possibility given the supply overhang that’s built up over the past few months, or indeed systemic demand side problems in China, Europe and the U.S. It’s not like America can’t go for QE4; China doesn’t want to flood the market with cheap money second time round. Europe remains structurally incapable of resolving the Eurozone crisis.
However, if we find ourselves entering a lower price environment, the U.S. has to resist its overwhelming temptation to do what it’s done every time prices have softened so far; use it as an opportunity to increase pressure on Iran. They did so in July by going after the financial and shipping sectors, and have just leant on the EU to increase pressures ahead of American elections. That makes for good short term headlines, but all it really does is (re)create its own self-fulfilling sanctions premium, enabling Iran to keep coining sufficient returns to offset price against volume. The economically smart move is to go the other way in a low price environment, quietly loosen sanctions and let Iran dump as much oil on the market as they can to find the real price floor – a move that would almost certainly depress prices further. Rather than constraining Tehran to 1mb/d exports, it would be far easier to take the ‘Iranian premium’ out of the market at that stage, let them ratchet export figures up toward 1.5mb/d, sinking benchmark prices towards $60-70/b. The Iranians would be stupid enough to follow through on renewed exports to claim a short terms sanctions ‘victory’ over Washington, even if they they’d fall into a long term $60-70/b trap. For Iran, that would actually mean selling oil into its core Asian consumers at significantly lower benchmarks still.
And that’s the real prize to be won at the bottom of the market; let the Iranian’s tighten their own noose around their own necks. A $60-70/b outlook would rapidly bring Iran to the economic brink of collapse, a development that will be far more economically devastating than continually letting Tehran cash in on its own mark-up. Bottom line, making weak prices even slacker is one credible way of pushing Iran to the economic brink and towards the negotiating table.
Scenario Two: Push Prices Beyond Global Tolerance
If that sketches a serious option at the bottom of the market, then the second scenario is to consider what play to make if Goldman’s has made a good call, and prices continue on an upwards trajectory. In part that might be based on Iranian meddling, in part because of supply difficulties afflicting producer states, not to mention the outside chance that economic output could pick up faster than expected on the demand side, and especially so in Asia. But perhaps more importantly than anything into 2013, oil bulls are well aware that the geopolitical calendar is stacked in their favour. We have Israeli elections in January hyping Iranian attacks to whole new levels, followed by Presidential elections in Iran come June 2013. Both will weigh heavily on oil market sentiment, especially because the Strategic Petroleum Reserve becomes far less acute once U.S. elections are out the way next month. The threat of using the reserve has been one of the key reasons why Brent has kept below $120/b for traders wary of being burnt. Into 2013, the SPR ceiling no longer exists. The sky is the limit.
source: forbes.com
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