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Oil trend after Iran N-deal

July 22, 2015

By: ASAD RIZVI   Published on July 22, 2015
Iranians have a profound reason to celebrate the landmark nuclear deal as it is expected to provide much-needed economic relief to them in the shape of currency stability, a rise in oil income and more importantly connectivity with the global banking system. The Iranian Oil Minister sounded confident during an OPEC meeting in the 1st week of June. On July 14 he said that his country could increase 500.000 barrels per day and add another 500.000 in the next 6 months to its production.

According to a World Bank oil consultant, Iran oilfields require huge repair, as they are old. Hence, to attain its desired production level, it may take another 2 years to repair the damaged reservoirs in oilfields. More importantly, the optimism is understandable, but there are few barriers that need to be crossed, as both houses of the US Congress are dominated by the Republicans, which is the opposition party and has strong reservations about the nuclear deal. This exercise may take another 60-65 days. President Obama has already hinted that he will use his veto if things do not move in the direction that he had delineated. All this may take another 4-6 months before Iran is allowed to flood oil the market.

Globally oil supply is already in surplus, exceeding demand. Therefore, Iran’s future oil sale prospect has one big risk that should always be threatening for the refineries to buy oil in future dates. The Obama administration is very clear that it will not compromise on compliance issue. This means, when Iran attains it full production level, oil glut will be unavoidable unless excess production is cut down.

Therefore, right now or for few more months, global understanding to lift Iranian sanctions will have no impact on global growth, which will continue to struggle. China is still a suspect no matter wherever its stock market goes up or down. The truth is that the Bank of China considered credit expansion beyond a 75 percent cap, but it is not workable, as nearly 20 pct of its homes are empty, hence its steel and cement industry will not be able to work at maximum capacity.

Similarly, soon after a global meltdown nearly half a decade ago it poured billions of USD to construct roads and dams, which are under-utilized. Its exports are sufficient to meet global demand that cannot be increased any further unless global economy bounces back. There are hardly new big avenues for a turnaround. Talk about Chinese reforms makes little sense, as there is hardly any area left that can deliver sizable growth. China’s Banking is one area that needs to be rectified, but reforms here could lead to plunge. The challenge is to attain real economic growth.

Nor is Greece solution growth oriented. One should not ignore the fact that sanctions on Russia too are not helping the cause. The IMF has already lowered its initially inflated global growth projection. If we analyse some of IMF’s past report, it has a clear strategy to support and arrest the possibility of a bigger fall by providing inflated growth target, which on most occasions is revised downward. Was the IMF not aware of Greece problem in the making or Chinese economy getting exhausted?

While oil production is still on the up, surplus oil and weak demand is the worst combination for oil price stability. It’s the domination factor to capture maximum global oil business and retain customers, which is keeping oil prices under pressure. USA’s domestic production has comfortably exceeded its oil import. Hence, unless OPEC members are willing to halt excess oil supply or Iran violates its nuclear deal, oil prices will remain soft, choppy and volatile.

Brent Oil @ & 57 = I suspect that Brent Oil will find temporary support around $ 50.50-52.80 levels for another test of $ 60-62 zones. Only a break of support level risks for a test of $ 43-45 zones.

WTI/Light Arabian Oil @ & 50.50 = It could potentially lose another $ 5-8 before correction occurs for up-side test of $ 55-58 zones. On the downside, the next major support level is $ 37, which is unlikely to be tested in near term before another drop occurs to test the Major support level in next 6-months time.

(The writer is a former Treasurer of Chase Manhattan Bank. The views expressed by him are not necessarily those of the newspaper)

Copyright Business Recorder, 2015

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