Iran Talks Throw a Wrench In

 | Nov 11, 2013 | 9:24 AM EST
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Question: If Iran can produce more than 3.5 million barrels of oil a day and uses far less than 1 million barrels a day, why does it even need to develop nuclear power?

The answer is simple and obvious, except to those advocating the Iranian "road map" that will lift or lessen the economic sanctions that brought Iran to the bargaining table. But, geopolitical results aside, and despite France's lack of enthusiasm for an Iranian deal over the weekend, the prospect of an agreement remains the primary weight on top of an otherwise strong crude-oil market.

Morgan Stanley's oil team estimates that, should sanctions subside -- and given a full 110 million stored barrels of Iranian crude ready to be shipped immediately -- 1.3 million further barrels of Iranian crude production will be on tap to flow into the global marketplace. That kind of production would represent an instantaneous shot of adrenaline for a cratering Iranian economy. Does anyone need to see any further reasons for the Iranians to say or do anything in order to get the sanctions relieved?

With another negotiating session on tap in Geneva, Switzerland in the coming weeks, pressure is mounting for the removal of the "unfair" sanctions oppressing the Iranian people.

For the oil markets, a sudden inflow of Iranian barrels can have a hugely debilitating effect on our shale-play exploration-and-production companies. These have only recently begun underperforming the rest of the market, courtesy of the new overtures to Iran and the Russia/Syria chemical weapons bargain.

While I could not have foreseen either of these very unlikely geopolitical developments (who could have?), oil still remains at $94 a barrel domestically and well above $100 elsewhere -- still impressive premiums. If this is the best that a bear market can do now that gasoline season is over, and given the (at least temporary) removal of the usual Mideast tensions, I'm not about to get short. Oil is the king of the "looks like we're headed down, oops, I guess not" move. I'm not getting stuck in it, even if it does go lower.

I've continued to maintain that the charts have reflected a long-term bullish trendline that should hold somewhere right around current levels. Even with new bearish geopolitical pressures, as well as the expected production increases in the Eagle Ford and Permian plays reported in the latest quarterly reports, that line is good.

Until it isn't.

Still, I continue to caution that this is no time to have all your chips in with the strongest E&P names we've successfully traded all year -- Noble (NBL), EOG Resources (EOG), Cimarex (XEC) and others. They will still be the most vulnerable stocks to an Iran deal.

I'm urging caution and waiting for another opportunity to find value in the space. It isn't here right now.

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