This week crude bears were finally able to break support, taking near month crude futures out below short term trading ranges. Bulls came back into the market Friday defending the $65 support level. However, energy option put buying on HO, RBOB and CL, have dramatically increased, indicating fear of a continuing down trend. Will Iranian nuclear negotiations next month reverse these fears?
The G20 meetings this week ended on a sour note with President Obama coming forward with accusations Iran is producing enriched uranium at a previously undisclosed facility. The month of October will continue with back and forth verbal attacks, with little progress towards a resolution, unless China and France back Obama's call for stronger sanctions.
Since Iran is less than 3% of world crude production, current over supply will easily make up for any lost barrels on the market. The greater concern is a decrease in Nigerian low sulfur crude production.
Nigeria produces 13% of world low sulfur crude. Low sulfur or "sweet crude" is preferred by refiners as production costs are less than the more plentiful high sulfur crude or "sour crude". Many refiners are are not capable of cracking sour crude into petroleum products.
Nigerian sweet crude production is down one million barrels per day vs 2005 levels.
Refineries in Nigeria have been cutting production and closing facilities due to political unrest and lower demand. Any increased violence in this area will create a return to 2008 bottlenecks of world sweet crude supply resulting in increased prices for crude and petroleum products.
This is not to down play the seriousness of the tension in Iran. Should verbiage escalate into actual physical conflict, crude will be well on its way back to $100. The greater probability is for shortages of sweet crude keeping energy complex futures firm.
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