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July cover


How Iran's nuclear deal may affect propane prices and global crude markets
Cost Management Solutions    
Cost Management Solutions
The big news last week was the announcement that a deal between Iran and world powers was finally reached after decades of talks on Iran’s nuclear program. Iran has been at loggerheads with the world community over its resistance to allow the International Atomic Energy Agency (IAEA) to inspect its work, and the international community became increasingly concerned that Iran had nuclear weapons ambitions.

Beginning in 2011, world powers finally felt compelled - due to Iran’s lack of cooperation - to impose economic sanctions on it in the hopes it would be forced to the negotiating table. Eventually those negotiations came to fruition, and after a long process, a deal that will lift the economic sanctions against Iran was completed. In exchange, Iran is disposing some of its enriched uranium and taking other actions to ease fears it is making a nuclear weapon.

In June, the Energy Information Administration (EIA) released a summary of the deal's potential impact on global crude markets.

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More crude from Iran is coming, but there is a lot of speculation on when it will actually hit global markets. Many believed it would be early 2016 before Iran complied with all of the conditions of the agreement that would lift the sanctions. Even then, it was suggested that Iran would only be able to move the 40 million barrels of crude it has in tankers it has used as floating storage while being sanctioned. The theories were Iran would increase exports by about 250,000 barrels per day (bpd) as it unloaded the stored crude, and then it would ramp up production.

However, Iran seems to have a much more aggressive plan in mind. It is already moving from its waters to Singapore a 2-million-barrel tanker. It also says it will increase its production by 500,000 bpd in two months and will have increased production by 1 million bpd in six months. That rate of production would put it near pre-sanction levels.

Iran has told other members of Organization of the Petroleum Exporting Countries (OPEC) they should essentially step aside and let it reclaim its lost market share. But other members of OPEC seem unwilling to do so. In fact, they have said they plan to keep production at current levels. They believe that increased global demand will be able to absorb the Iranian increased exports without a cutback on their part.

In addition, OPEC believes that if the world is oversupplied, the high-cost U.S. producers will be forced out of the market. For their part, U.S. producers have been less willing to cut production than many thought. But growth in production has certainly slowed with decreased drilling activity, and actual declines in production may not be far behind.

It is believed the world is oversupplied with crude by 2.5 million bpd before Iran’s increased production is added to the mix. That certainly has the potential to put more downward pressure on crude prices, which seems to be about the only thing that would drive propane prices lower. Propane values seem reticent to drop much below their current relative value to crude, even though inventory is at record-high amounts. But if crude drops, then propane prices could still fall without dropping in relative value to crude.

Propane prices are very good currently, and buys are almost certain to work out. But with inventory high and crude seeing increased downside risk, it makes it tough for propane retailers to pull the trigger, even with the current tempting prices. Either way, it is stacking up to be a favorable winter for propane retailers and their customers if logistical issues and market-specific price spikes can be avoided.


Mont Belvieu held up well against falling crude, despite very high inventory. Traders talked of strong physical demand and cuts to prospective propane supplies as supports. We are neutral on propane and bearish on crude to start the week.

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Last Week's Highlights
Conway propane fell sharply to begin the week and Mont Belvieu slipped slightly as well. Crude fell on word an Iran nuclear deal had not been completed over the weekend. However, news that Greece’s creditors had accepted its proposal for getting the aid it needs to stay solvent was a support and limited the downside for crude.
The Iran nuclear talks were finally completed with a deal that would lift sanctions against Iran. Surprisingly, crude markets were up on the news, despite the fact the deal should compound crude oversupply issues. Conway posted a nice rebound, but failed to capture all of its losses from Monday. Mont Belvieu cut its Monday loss as well.
Crude prices fell in a delayed reaction to the Iran nuclear deal being completed, shaking off a 4.3-million-barrel draw in U.S. crude inventory. The EIA reported a below-average build in U.S. propane inventory, helping send Mont Belvieu propane higher, while Conway remained unchanged. Talk of potential cutbacks in propane production helped fuel interest in propane, causing a higher rate of transactions for Mont Belvieu propane.
Crude prices continued to retreat, as traders dealt with the reality of more Iranian crude available to markets. Propane prices were up, despite the fall in crude. Propane trading volume remained brisk. The shutting of a key North Sea crude field supported Brent crude, but West Texas Intermediate could not stay up with the gains in the Brent grade.
Crude prices were choppy, as traders tried to figure out positioning with the Iran nuclear deal complete and reports Iranian crude cargoes are already on the move. Propane prices were little changed from Thursday’s close, as the heavy trading volume from earlier in the week slowed.

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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.

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