Time to make a Deal

Oil goes up on deal talks, and oil goes down on deal talks.

It can’t break the news cycle, although this week we observed that even with big impact news, oil is not reacting, at least for flat price as one would think. A China deal is worth $2/bbl (I won’t even dignify calling the UK-US settlement a “deal”). Later in the week, advanced talks between the US and Iran were worth $1.5/bbl. On the surface, none of these news made much of a fuss, but looking at it granularly, the US-China is an LPG story, a naphtha story to a lesser extent, and the Nuclear Iran-US is an OPEC story.

I’m trying to put together the pieces on the latest developments concerning policies and backroom dealings in oil.

Hear me out: What is Trump’s priority now? To bring Putin to the table, that seems more elusive by the day. Sanctions don’t work if they are not enforced, and the G7 clearly can’t enforce them, but we know someone who can

Maybe in the Geneva talks, the Chinese added some sweetener to appease Trump, in the shape of helping Trump to force a ceasefire in Ukraine, by exerting some economic pressure on the fragile Russian economy, which in a way they are already doing, pushing the discounts of Russian barrels to the highest that they have ever been, despite these barrels are flowing (3.45Mnbpd as per May). Of course, China will not be happy with all their cheap barrel sourcing cut-off, hence, enter Iran.

For a couple of weeks now, every single day we have had an OFAC sanction update on Iranian assets, linked individuals and such… that is not a serious approach but might be signaling they want to sit down. Iran in its own way is showing a willingness to start negotiations with the ultimate condition of removing all sanctions. The market assigned a greater probability of this happening. Remember what Bessent said when the trade war broke out? “He who sits down first gets the best deal” and among the blacklisted barrels, the ayatollahs seem more open.

What does China gain? For once, more leverage over Russia, but also convenience, since China needs more Iranian than Russian molecules. Iran is not only oil, is LPG and condensates, these condensates can be fed into a splitter and then separated into heavy and light naphtha, and then to petchem, same as LPG, which aligns with the CPP in boosting the petro chemical industry, and at the same time reducing its dependence from US LPG. If China must choose between Russia and Iran, they chose Iran.

What does Iran get? More money, for once, but also they can also diversify their customer base, reducing its dependence on China, because unlike Russian oil, Iranian oil can go West.

What does Trump get? His nomination for the Nobel Peace Prize for starters, and catching two birds with one stone. He needs to untangle the Red Sea transit, this last proved a little shameful in military terms… $1bn spent, a couple of F35s gunned down… and yet transit doesn’t pick up.

And then, what I believe is the most important piece of this puzzle, Saudis. What made Saudis to suddenly start pumping more? Is not to cater Trump, it is in anticipation on something… previous thinking was “to replace Iranian barrels when they choke it”… well, adding 167kb per month to replace 1.8Mnbpd sounds a little bit erratic. To reclaim market share against Non OPEC & Kazakhstan? Those are light sweet barrels that nobody wants (more on that later)… what if is the claim for market share is against a comeback of the other Medium Sours baseline barrels?

Aramco not only signaled that they will add more barrels to the market, but they kept their OSPs competitive and locked in 48mn bbls to Chinese customers, next month will do the same, it looks like they are frontrunning someone… Iran?

Lastly, what does it mean for oil? Strictly speaking these barrels are already in the market, so net effect is close to zero, but where they are not is in “the spot market”, and that creates a problem for the Dubai benchmark, affecting Middle East OPEC buddies.

Inflicting pain to Russia, Saudis taking a hit, Chinese paying more for oil, all things we will have to endure to achieve stability, eventually winners and losers balance out.

Is more a Iran story as it is a Russia story, used one pawn to force the other to cave in.. and Europe is trying to make the first move, you think Trump likes to be outpaced by Macron?