ANS grips mid-$80s

Bearish demand factors stack up, but ANS maintains most of recent gains

Steve Sutherlin

Petroleum News

Despite plunging $2.40 in three consecutive trading days, Alaska North Slope crude persevered in the mid-$80s May 22, closing at $84.35 per barrel after falling $1.04 on the day. WTI plunged $1.60 on the day to close at $77.57 and Brent fell 98 cents to close at $81.90.

All three benchmarks ended the day down more than 1% as U.S. crude inventories staged a bearish surprise gain.

Meanwhile, the U.S. Federal Reserve indicated higher interest rates may continue into the near future, raising the specter of fading U.S. demand. Even in China and other Asian markets, demand for crude appears to be waning.

Given the bearish sentiment, the Organization of the Petroleum Exporting Countries and its allied exporting nations (OPEC+) is expected to agree to keep its current production cuts in place when it meets in June to review its cooperative supply management program.

For the week ending May 17, U.S. commercial crude oil inventories -- excluding Strategic Petroleum Reserve barrels -- jumped 1.8 million barrels from the previous week to 458.8 million barrels, 3% shy of the five-year average for the time of year, the Energy Information Administration said in its May 22 weekly summary.

On average, analysts answering a poll conducted by S&P Global Commodity Insights had forecast a decline of 2.15 million barrels.

Total motor gasoline inventories fell by 0.9 million barrels from the previous week to 226.8 million barrels, 2% under the five-year average for the time of year, the EIA said. Distillate fuel inventories increased by 0.4 million barrels.

The SPR was up by 1 million barrels to stand at 368.8 million barrels May 17, the EIA said.

ANS sagged by $1.13 May 21 to close at $85.39, while WTI fell 54 cents to close at $79.26 and Brent slid 83 cents to close at $82.88.

Monday May 20 set the tone for a market shift to red ink as ANS was off by 23 cents to close at $86.52, WTI shed 26 cents to close at $79.80 and Brent shed 27 cents to close at $83.71.

Prices surged in early trading May 20 after Iran's President Ebrahim Raisi died in a helicopter crash on May 19, but the rally sputtered as traders discounted the likelihood of immediate changes in the country's oil strategies.

ANS gained 69 cents May 17 to close at $86.75, while WTI gained 83 cents to close at $80.06 and Brent gained 71 cents to close at $83.98.

On May 16, ANS rose 54 cents to close at $86.06, WTI rose 60 cents to close at $79.23 and Brent rose 52 cents to close at $83.27.

From Wednesday to Wednesday, ANS peaked for the week at $86.75 May 17 before sliding to a close of $84.35 May 22 -- just $1.17 below its close of $85.52 May 15.

On May 22 ANS sported a premium of $6.78 over WTI, and of $2.45 over Brent.

Iran elections may foment moderation

"The Iranian president is more a mirror than a lamp, reflecting the wishes of the Ayatollah Khameini and that will not change," Michael Lynch, Forbes senior contributor said in a May 20 note.

Iranian law will require new elections near the end of June, increasing the potential of domestic turmoil and perhaps political and policy changes, Lynch said. Mismanagement and sanctions have dogged Iran's economy, sending the rial down and inflation up above 50% as citizens chafe under the "political and social repressiveness of the regime."

"On the surface, no significant change is likely in the regime's anti-U.S., anti-Israeli stance nor its support for proxy groups in the region, including Hamas, Hezbollah, and the Houthis," he said. "Still, it is worth noting that the government had already urged those groups to moderate their attacks, at least against U.S. forces in the region."

In the event of a long-term truce, Iran will have room to moderate foreign policy, he said. A new agreement on its nuclear program could boost oil exports and defray some economic pressure on the regime.

A new round of sham elections could inspire public apathy but pressure on the government seems likely to increase, not decrease, and reform may present a better path to regime survival, Lynch said.

Unrest could disrupt oil supplies especially if oilfield labor action occurs, as during the 1979 Iranian Revolution, Lynch said, adding that major demonstrations and unrest in themselves would increase the security premium on oil.

Longer term, an optimistic scenario holds a regime more responsive to the public, seeking economic growth and better relations with the West.

"Of course, the regime has mostly avoided such a path for the past four decades, but as the saying goes, nothing changes until it does," Lynch said. "In summary, the impact on oil prices is short-term bullish, long-term bearish, but when the long-term arrives is the biggest question."