The geopolitical premium is back
They both spoke on the same day at different events: Sechin stated in Verona that the goal of inventory stabilization had not been fully implemented and that it was too early to talk about a watershed in the global markets.
On the same day, in London, Barkindo lauded a massive drainage of oil stocks. According to OPEC’s measure of advanced economy stocks they have come down 180 million barrels since January. Sadly they are still on the upper end of the five-year average.
Both gentlemen had a point:
In December 2014 an alliance of 24 OPEC and non-OPEC countries decided to reduce global oil production by 1.8 million barrels per day (bpd). After an initial spike in January the price recovery was sluggish, in spite of better-than-expected OPEC compliance. The reasons were manifold.
US shale producers came back to the market with a vengeance as soon as the price hit $40 per barrel. They had increased their productivity by around 3 percent a month during the lean years and thus had become a lot more resilient.
Nigeria and Libya had been exempt from the cuts out of consideration for their internal political situation. Last summer their incremental production exceeded 700,000 bpd. It blindsided the markets.
That said, US stocks, which are given disproportionate weight by traders, have started to decrease significantly. Since April they drew by 77 million barrels and now stand at 456 million barrels, which is admittedly above the five-year average. US stocks are coming down at an accelerated pace, though.
Demand is up and the forecast looks rosy. According to OPEC, plus 1.5 million bpd in 2017 and plus 1.4 million bpd in 2018. The global economy is forecast to grow at 3.5 percent.
Nobody ever said rebalancing the oil markets was going to be easy and everybody knew it would take time. There were bumps along the way and there are many unknowns out there: How much incremental production will we see from the North American shale space? Will the rosy growth forecasts hold up?
OPEC on its part does what it can to support a rebalancing of the markets. It is deliberating a second extension of the OPEC non-OPEC deal through 2018. Saudi Arabia indicated it would curb its exports for November by 500,000 bpd and everybody keeps a keen eye on compliance with the deal.
Global oil markets are starting to rebalance as political risk from Tehran to Kirkuk begins to have an impact on the price of crude.
The biggest indication that we are close to a rebalancing of the oil markets came when the geopolitical risk premium returned for the first time since 2014. Last week oil prices showed gains twice. Once when President Trump refused to recertify the Iran Nuclear Agreement and the potential of renewed sanctions came on the horizon. The second time when the Iraqi forces beat the Kurdish Peshmerga and took control of the oil-rich area around Kirkuk. Markets feared for the oil which flows through the Kurdish-Turkish pipeline to Ceyhan.
The former would have little short-term effect on markets. In case of renewed US sanctions the National Iranian Oil Company would redirect exports from OECD countries to Asia. In the longer run it would, however, have a big impact because the Iranian oil sector is in dire need of investment and Western technology. The latter would have an immediate impact on oil markets because it can potentially take out supply amounting to 600,000 bpd. Last week saw the volume reduced by about 360,000 bpd. (Turkish and Iraqi officials attributed this to “technical difficulties.”)
Markets are rebalancing and OPEC as well as non-OPEC producers are doing their bit. There are as always risks to this process. However, the very fact that we saw geopolitics matter again is a sign that we are on the right track.
• Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources
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