First they came for Cuba. Then they came for Iran.

/ July 14, 2015
Frenemies

Frenemies

Little by little, Venezuela’s supposed “allies” are acting against her interests by reaching agreements with the “imperialist” powers of the West.

On the heels of Cuba’s rapprochement with the US, today we learn that world powers have struck a deal with Iran that would lift sanctions on oil exports in exchange for limits on Iran’s nuclear program.

The media is reporting that oil prices are falling on the heels of the announcement. Iran is widely expected to begin selling large amounts of oil once sanctions are lifted, which could come soon.

Here is the WSJ:

Even once Iran gets new oil flowing, it will have to sell it in a global market roiled by the rapid growth of U.S. oil production. All that added supply has helped set off a price war with producers scrambling to keep traditional customers and find new ones. Iran will have to move aggressively to win back market share, say traders and analysts.

Reuters says the drop may not be as big as feared:

Front-month Brent crude futures LCOc1 were 35 cents lower at $57.50 a barrel by 1245 GMT (8:45 a.m. EDT), off a session low of $56.43 a barrel. U.S. crude CLc1 was trading down 8 cents at $52.12 per barrel after declining earlier to $50.38.

“A lot of people had expected the deal. After an initial move the market reached an equilibrium as a lot was already priced in,” Simon Wardell, analyst at Global Insight, said.

Bloomberg was equally cautious:

Oil was 0.6 percent lower in New York after dropping as much as 2.5 percent earlier.Iran’s agreement to curb its nuclear program in return for the removal of sanctions is “the first step on an arduous path,” according to ING Bank NV. It will enable Iran to restore about 500,000 barrels a day of oil exports by mid-2016, Commerzbank AG estimates.

“A substantial return of Iranian oil to the market still looks to be a long and winding road,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA, said in a report.

As with everything related to oil markets, it’s wait-and-see. However, the trend does not look good for Venezuela’s financial stability. No news yet on how Venezuelan bonds are performing.

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13 thoughts on “First they came for Cuba. Then they came for Iran.”

  1. On the BBC this morning they were saying the geology in Iran isn’t very conducive to fast wins in terms of bringing new production on line. They can do it, definitely, but it will take a couple of years. A couple of years, a buttload of oil rigs and TONS of investment.

    Those are oil rigs and investment funds that won’t be deployed to the Orinoco basin. Which seems like the kicker here: in a climate where producers have to actively compete to attract a collapsing base of new investment, a major new competitor just got in the game.

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    • Iran has been stocking oil in ships for some time. Up to 35M barrels, that oil is ready to sell once you lift the sanctions and check its quality of that oil.

      Without taking Iran into account, the oil markets was expected to be oversupplied until t least mid 2016, fracking operations have been more robust than expected, so downward pressure on oil prices are going to be in place for at least one more year.

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  2. Getting the sanctions fully lifted will take some time , the logistics of resuming full production are not simple , Iran has some VLCC storing crude oil which will inmmediately be placed on the market but the overall effect wont be felt until a couple of months . It will affect some markets more than others . For example India (Irans next door neighbor) was one of Irans best customers before the sanctions , after the sanctions Venezuelan oil found a market in which to place several hundred thousands bls of its production , now as Iran production flows back into india venezuelan crude will be displaced to other markets , not sure which they will be . The lifting of sanctions is very bad news for the Venezuelan regime.!!

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  3. On the long run, this is another crucial piece of good news. It will help speed up Chavismo’s demise.

    Fracking + Iran oil changes entire hemispheric and Global balances of power. Even China and Russia must shift. As does Brazil. Kleptozuela can’t bribe all countries any more. as we saw with Caricom, the isolation is just starting.

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  4. The same was said for Libya and Irak oil. Iran has not necessarily stopped selling oil and they have a quite good infrastructure. They were “trading” their oil and of course some of it dripped through the cracks of the sanctions (read Venezuela-Iran relationship and India/Turkey/Pakistan). Thus form pure production balance point of view, “there is not more oil” at least at this time.

    The true gains is that now the Iranians will be more open and more safe for foreign investment and that will give them a more assertive position within OPEC. The Iranian government, although as bad as it could be perceived, in reality is quite stable and it has been that way since 1979. Thus, capital will move there to exploit the lift of sanctions. The Iranians have been looking for this and the will go to great extends to ensure investors feel safe on getting their money in the country. Add that plus the quality of the Iranian oil and then you will have more oil in two may be three years.

    How that resonates against Venezuela?. Guess anyone?

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    • You are forgetting the less working class youth who support the Revolution. The majority of Iran would like a different regime, but as long as the mullahs still retain a significant minority of support and control the armed forces, they are here for a long time yet.

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  7. @JC, bonds have been selling off in general since mid-May, but some of the lower-priced debt has found a floor around 30% prices. A different story on the short end of PDVSA, where some of the best-performing bonds YTD have been hammered recently: PDVSA 2017 8,50% (the one with the amortization due on Nov 2nd) is currently trading at 63 cents on the dollar in street, down from 80% on early May. Lots of rumours of govt entities selling this bond to buy PDVSA 2015 (this one is trading at par and impossible to find). The market in general is suffering from a triple-whammy of risk-off tone in EMs + rising rates in US + poor liquidity and high volatility that scared off most of the active investor base.

    Best regards,

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  9. Any way you analyze this, Venezuela has a huge balance of payments problem. The foreign reserves are depleting rapidly and will run out in a matter of months, not years. With the current structural problems, Venezuela cannot get new financing in the form of spendable cash. The recent deals announced do not provide the government with new liquidity. There is a limit to how much the government can starve the economy (and the population) without open revolt. The Iranian deal, and the resulting drop in oil prices can only serve to accelerate the process.

    Everyone always knew that this was not sustainable. We just didn’t know how long it could last. Now we do. Just keep monitoring the foreign reserves balance. When it gets to zero, the game is up.

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