The oil market is not waiting for Godot, but for November 4, when US sanctions on Iranian oil comes into play. The supply side of the oil market is becoming tighter even before as some important consuming countries such as South Korea and Japan curtailed buying from Iran.
Add to that further declines in Venezuela’s production and the International Energy Agency (IEA) is right in saying “We are entering a very crucial period for the oil market”. Reports suggest Iran is already resorting to storing oil on tankers as exports fall, and Amrita Sen of Energy Aspects said shipments are “set to average as little as 1.5 million barrels a day in September according to the preliminary loading programme, compared to around 2.8 million barrels a day of oil exports in April and May.”
Eight tankers holding 14 million barrels of Iranian oil are reported to be anchored in the Gulf. US producers of condensate are looking forward to replace Iran in supplying Asian markets to satisfy petrochemical demand.
India is reportedly curtailing imports from Iran significantly, but Indian officials have told Washington that they cannot take imports down to zero as demanded by Trump. The ‘Financial Times’ recently reported the US is helping its allies to find alternative supplies.
But some are asking for waivers such as obtained during the sanctions of 2012–15. In a visit to India, Mike Pompeo, US Secretary of State, said the US would consider waivers “where appropriate”, but reiterated “our expectation that the purchases of Iranian crude oil will go to zero from every country, or sanctions will be imposed”, a nicely veiled threat.
Despite the production easing by Opec and non-Opec producers led by Russia, oil prices have remained in the range of $70-$80 (Dh257.11 to Dh293.84) a barrel since April, though with great volatility. This is the range the majority of analysts expected.
However, at least in two or three recent occasions, Brent crude pierced $80 only to retreat quickly to lower levels. As I write, the price is close to $78 while the August average was $73.84 and even lower in July. Therefore, the year-to-date average is $72 a barrel, almost $20 higher than the same period in 2017.
There are other risks facing the oil market. Venezuelan production is thought to be falling further. The protests in the city of Basra may not have affected Iraq exports so far, but threats have been made against oil companies. The situation could worsen as there is no government after five months of elections and political factions cannot resolve the problems of this important oil region.
Libyan production, despite the latest improvement, cannot be relied upon as the political situation is not promising any stability. In the US, the approach of the hurricane season could affect supply as it often did in the past.
On the demand side, there is the risk of slowdown in expected growth due to currency depreciation in some countries and the fear of contagion, in addition to the impact of Trump’s trade wars that are heating up. However, the supply risks far outweigh those of demand and therefore prices could appreciate, or at least stay at the high end of the current range.
This brings us to the question of how much reserve capacity is available worldwide beyond the current production. The figure of 2.6-mbd of spare capacity in Opec and its associates is often cited, and in theory this would be enough even if sanctions on Iran achieve their ultimate aim. Specifically, Saudi Arabia and Russia are expected to, and could, raise production significantly.
Some analysts are suggesting that this dormant capacity has not been used for a long time and need to be tested. In all cases bringing this capacity on stream would take at least several months. This is why prices could be heading higher than the current range.
Russia’s energy minister Alexander Novak described the oil market as fragile with huge uncertainty and that the “situation should be closely watched and the right decisions should be taken.”
Source: GulfNewsPrevious Next
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