With the ending of the Iran oil sanction waivers now announced by the Trump administration, the oil sector is rallying. Oil prices are likely to rise a bit more, potentially drop a bit on the end of summer driving, but ultimately firm as IMO2020 increases light sweet demand.

The just beginning bear market in healthcare stocks is helping fuel the rotation. In the next few days, I will be laying out the case for buyouts and mergers in the stocks I have covered. Specifically, we’ll try to identify buyout prices likely to be happen.

Come later this week, to see where the Dirty Dozen Oil Stocks are likely rising too. Read the Dirty Dozen article as a primer. Here are a few thoughts about light sweet crude produced by U.S. producers.

Ending The Iran Oil Sanction Waivers

The Dirty Dozen Oil Stocks piece covered the main points to be aware of and accept regarding oil. One point I made was that “Saudi Arabia is (…) the ONLY nation with the capacity and design to manipulate oil prices.” A key component of ending the Iran oil sanction waivers was getting Saudi Arabia to agree to increase production.

Of course, Saudi Arabia cutting production was always designed to force President Trump to end the oil sanction waivers on Iran. How so? By cutting production and forcing oil prices up, Saudi Arabia, took the upper hand in oil. President Trump needs oil prices to stop going up up in order for the economy to stay strong and have a chance to win in 2020 (remember, Presidents lose elections when the economy is bad).

Saudi oil production capacity is about 12mbd. They set a record last year producing 11.4mbd for a moment. After the waivers on Iran oil were granted however, Saudi has since cut production to 9.3mbd. Eliminating the waivers on Iranian oil will mean the market needs to find about 1mbd per day. Saudi Arabia and the United Arab Emirates have agreed to provide it.

Saudi Arabia has also likely agreed to again supply PADD 3 their crude as well. One of Saudi Arabia’s actions the past few months was to reduce to near zero, their oil flowing to the U.S. Gulf Coast refineries. Those refineries need about 300,000 more barrels per day and Canada isn’t an option as pipelines are stalled. Saudi Arabia will surely fill the gap that has developed in the past few months.

Impact For U.S. Oil Companies

There are two main impacts of ending the Iran oil waivers. First, there will be a touch more U.S. light sweet crude oil exported. The main impact might be that blending in U.S. refineries will be more efficient again, with the Saudi oil coming back to PADD 3 – it takes medium or heavy sour, to blend with light sweet to produce many distillates.

The big news for U.S. light sweet crude this year however might be IMO2020, which is the International Maritime Organisation new regulations on fuels beginning in 2020. Beginning in January, ocean-going vessels must cut sulfur content from a maximum of 3.5% of fuel to .5% by weight.

Maritime fuels account for 4% of global oil demand. Light sweet crudes will likely benefit from increased demand for cleaner fuels. The process will be slow though as refiners are slow to change their configurations. However, some such as Marathon Petroleum (MPC) and Valero (VLO) are positioning to benefit from the changes from both IMO2020 and increased U.S. light sweet production.

Here is a good description of what to expect from IMO2020: 

EIA: IMO 2020 Will Affect Petroleum Markets 

The likely outcome for light sweet, which is what U.S. companies produce (95% of production), will be slightly higher prices that are likely sustainable given trends in pollution controls. Higher light sweet crude prices drop to the bottom line for U.S. oil producers.