There’s about $10 of air pocket between the present WTI crude price of $43.36 and the next long-term support level. For several reasons oil could plunge below the 2008 lows during the next several weeks. Longer-dated futures are more vulnerable than short-dated.
First, storage capacity is nearly exhausted. With 12-month WTI futures trading at $11.40 above spot, storing physical crude for future delivery has been a favorite hedge fund trade. Oil inventories in the US now stand at 448 million barrels, up 21% from last year; theoretical storage capacity is about 600 million barrels, but that’s never been tested. Storing oil on VLCC’s isn’t an economical option (the cost of storage is over $1 per barrel per month, more than the price differential between spot and futures in the present cotango).
Second, Saudi Arabia–the prime mover in the oil price collapse of the past six months–has all the more reason to keep downward pressure on the oil price with an international deal looming to lift sanctions on Iran. The Saudis don’t have a lot of friends these days. It’s clear that the Obama administration is comfortable giving Iran the upper hand in the Persian Gulf. The February Threat Assessment Report of the US Director of National Intelligence, James Clapper, amounts to an endorsement of Iran’s benevolent intentions in the region. The absence of language about Iran’s support for terrorism attracted a lot of attention in the press, but the most significant sentence in the report accentuates the positive where Iran is concerned: “Despite Iran’s intentions to dampen sectarianism, build responsive partners, and deescalate tensions with Saudi Arabia, Iranian leaders—particularly within the security services—are pursuing policies with negative secondary consequences for regional stability and potentially for Iran. Iran’s actions to protect and empower Shia communities are fueling growing fears and sectarian responses.” Only indirectly does Iran threaten regional stability, according to the Director of National Intelligence. That’s news to the Saudis, who are likely to keep downward pressure on oil in order to damage Iran.
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