POWER POINT
What I’m hearing from energy insiders
While the SpaceX IPO has rightly captured investors’ attention, it’s been another story that has actually moved the market: the war in Iran.
We have a deal. Or at least, a deal to make a deal. That deal to make a deal is dealing oil lower. Unless there is no deal and “bombs start dropping” again. I’ll get to that.
Wordplay aside, the last few days have been remarkable for oil, energy, and markets. The U.S. and Iran reportedly have a framework for a longer-term peace deal. While much still needs to be worked out, the markets love the news, and oil prices have fallen dramatically. The Dow Jones Industrial Average surged above 52,000 for the first time ever Tuesday on the news before selling off on Wednesday.
FUN FACT → ExxonMobil was ingloriously removed from the Dow in 2020. If the oil giant were still in the index, the Dow would be above 54,000 right now.
Crude’s move lower has been the quickest since Covid. From its April 7th peak of nearly $113, oil has fallen 30%. The bottom may not be in yet. Here’s why.
The world is waking up to the fact that Middle Eastern countries can ramp up production faster than many expected. I mentioned this a few days ago on X:
That is one of the 4 key things I am watching around oil right now:
The “Ghalibaf Factor”Forward oil contractsSanctions reliefGulf states load rate
First, what I term the “Ghalibaf factor.” Mohammed Ghalibaf is a leader of Iran’s hard-line element. His participation in the virtual deal signing carries weight, because if he and the other backers of the Ayatollah are not seen as being on board with any deal, the chance of more violence rises. Higher violence means more risk, and more risk means higher oil prices. We addressed the issue in our interview with Vice President Vance on Squawk Box Monday.
While Ghalibaf is undoubtedly someone not afraid to fight, he recently made news in Iran by calling for greater focus on economic growth rather than fighting. It’s another small piece of good news and something to watch.
Another key is to keep an eye on the forward oil contracts, not just the front-month price. Looking to August, September, and longer-datedlonger dated futures will give you even more clues into what markets expect.
Third, keep an eye on any headlines around meaningful sanctions relief on Iran from the U.S. and its European allies. Any easing of restrictions around Iranian oil exports is a net positive for global supply and could send prices even lower.
Finally, how quickly the region can resupply global markets is a massively important factor in prices going forward. The faster Saudi Arabia, the U.A.E., Kuwait, Iraq, Bahrain, and Qatar can ramp up, the faster oil prices will fall. With China’s lower demand – something we wrote about in last week’s Power Insider – any hint of higher export totals will benefit lower prices.
Wall Street is realizing faster crude exports are possible. JPMorgan just wrote about oil flows starting to “creak open:”
“We estimate June oil flows through Hormuz are running at 5.1 mbd, up from 2.9 mbd in May, 3.3 mbd in April, and 2.2 mbd in March (Figure 1). The rebound is meaningful, but it still leaves flows at only about 25% of pre-war levels. Within that total, roughly 0.8 mbd is labeled as Iranian exports. These cargoes likely do not reflect “true” Hormuz transits: they appear to move, then pause in Omani waters, and likely turn back following a US Navy blockade. We include the 0.8 mbd in our crossings estimate, but flag them as low-certainty.”
Our friends at MarineTraffic by Kpler brought us some key data that there are 130 empty – or ‘at-ballast’ – oil tankers in the Persian Gulf right now. This is well below the average pre-war total of about 250 at-ballast tankers in the water. The number of available ships is critical because it goes directly to how fast countries such as Saudi Arabia, UAE, Kuwait and others are able to export via ship.
MY FIRST TAKE → Oil flows will resume faster than many believe. This is based on direct conversations with industry executives and experts based both here and in the Middle East. Ships should start steaming – quickly – to the AG (Arabian Gulf, in charter parlance).
All this talk about oil, but what about something you might care about more: gasoline prices. They’ve already started moving lower. AAA reports that the national average is about to fall back below $4 bucks a gallon. 11 states are back below $3.65. Ill go a step further. Within 2 weeks of you reading this, the national average for a gallon of gas should be back below $3.50. I made ‘the bet’ on CNBC earlier this week and posted it to X. I may be wrong, but if I’m even close to correct it’s a big win for consumers!
It’s important to also issue a supertanker-sized caveat to all this optimism.
MY SECOND TAKE → Don’t sleep on the possibility of more fighting, risk and higher oil prices. President Trump said Wednesday that he will resume “dropping bombs” if he doesn’t like the Iran deal. There is also the chance that Israel ramps up against Hezbollah again in Lebanon. Nothing is certain.
Let’s be positive, however. As of this writing, we have a deal to make a deal. Take the cue from the markets. Oil lower. The big stock indexes are mostly higher. The next few days and weeks are critical to global energy and global energy security. Stay focused, and stay tuned.
WALL STREET’S TAKE
Oil is back below $80. So now what is an investor to think, and do?
While it was a relatively research-light, holiday-shortened week, there were a few calls of note.
First, Goldman Sachs lowers its Brent crude forecast by $5 bucks a barrel to $80. The reasons are higher supply and lower demand. The firm writes:
“We lift 2027 supply in the UAE (given its OPEC exit) and the Americas (i.e. US, Brazil, Guyana, and Venezuela) on firmer realized and projected supply in our Top Projects dataset. While demand is likely to largely bounce back after reopening, we assume that just over 10% of the demand weakness persists as China’s shift to alternatives (e.g. EVs) accelerates.”
Goldman’s team estimates that flows from the Arabian Gulf have already popped back to 11 million barrels per day, driven both by increases in ship flows via Hormuz and ‘redirections’ (aka pipelines).
An important side note: the China oil demand – or lack thereof – story is a biggie, and we wrote about it last week. The question for oil markets is whether this decline in demand reflects a longer-term structural shift in China’s oil demand or a shorter-term slowdown. Beijing has to buy most of its oil, which makes it vulnerable to geopolitical events beyond its control. For a government focused on control, this is unacceptable.
MY TAKE→ China may be cutting its demand for oil, but it remains the king of coal. The country’s coal-powered utility growth has soared over the last two years, even with huge additions in solar and wind energy.
Citigroup is also on the tape:
“Oil markets have been driven primarily by geopolitics since the beginning of the year, starting with the US and Venezuela, and more recently concerning the US and Iran. One big unknown was whether the US and Iran could find a path towards SoH trade flows restarting, and this question appears answered, with both sides (Iran and US) today confirming an MoU has been approved, which is set for signing this Friday. As a result, we see SoH flows resuming relatively quickly, normalizing by mid-late July. In our view, the market is pricing the MoU itself, but not an agreement that secures SoH flows over the medium term; otherwise, crude oil prices would likely be ~$10–15/bbl lower than they are today. Limited appetite for renewed conflict from the US, and Iran signaling willingness to deal, point to selling summer oil rallies, in our view.”
Geopolitical headlines have been loud enough to drown out what might otherwise be some interesting chatter: ExxonMobil (XOM) was briefly reported to be interested in buying Australia’s Woodside Energy Group (WDS).
RBC analyst Biraj Borkhataria remains unconvinced about the “strategic merits” of such a merger. He writes that Exxon’s recent buys have been “much more targeted” and cites the Pioneer Natural and Denbury deals as examples. Borkhataria notes that Woodside has a “steadily declining” legacy business in Australia and the rationale for an ExxonMobil purchase does “not look obvious” to him.
Woodside shares popped last week on the rumor, then fell back after the Aussie company said it received no takeover bid from ExxonMobil.
Though oil and gas have dominated the news over the last two months because of Iran – Power Insider is going to be about all things energy. With that in mind, there was quietly a big call on nuclear from star analyst James West at Melius Research this week. West says nuclear’s “now” moment is, well, now.
He writes that Constellation Energy Group (CEG), Vistra (VST) and Talen Energy Group (TLN) are all approaching “real cash flows from nuclear today.” He highlights how Vistra “continues to execute,” and earlier this year signed a 20-year deal with Meta. His price target implies a doubling of Vistra.
He calls Constellation the “nuclear benchmark” as it gets closer to restarting the nuclear plant formerly known as Three Mile Island.
West is also bullish on NextEra Energy (NEE) and Mirion Technologies (MIR), saying Mirion is “structurally advantaged” in the nuclear market. For those paying attention, it’s our second Mirion recommendation in just a couple of weeks.
INSIDE LINE
RANDOM, BUT INTERESTING
CNBC’s Yun Li reports about Silicon Data, which tracks the pricing of computer chips sold by Nvidia and the other big chipmakers leading the AI buildout. Silicon data is partnering with the CME Group to launch futures contracts tied to so-called compute.
The company’s founder and CEO Carmen Li believes compute could one day be a larger futures market than oil.
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