Oil near 4-year high as producers resist output rise to offset Iran sanctions

Bank of America Merrill Lynch said ‘the Iran factor may dominate the market near-term and cause a (crude price) spike.’ (AFP)
Updated 25 September 2018
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Oil near 4-year high as producers resist output rise to offset Iran sanctions

  • The United States from November 4 will target Iran’s oil exports with sanctions
  • US President Donald Trump has demanded that OPEC and Russia increase their supplies to make up for the expected fall in Iranian exports

SINGAPORE: Oil prices on Tuesday were within reach of four-year highs hit in the previous session, as looming US sanctions against Iran and unwillingness by the Organization of the Petroleum Exporting Countries (OPEC) to raise output supported the market.
Brent crude futures were at $81.45 per barrel at 0421 GMT, up 25 cents, or 0.3 percent, and close to the intraday peak touched the previous day at $81.48, the highest level since November 2014.
US West Texas Intermediate (WTI) crude futures were at $72.27 a barrel, up 19 cents, or 0.3 percent from their last settlement.
The United States from Nov. 4 will target Iran’s oil exports with sanctions, and Washington is putting pressure on governments and companies around the world to fall in line and cut purchases from Tehran.
“Iran will lose sizeable export volumes, and given OPEC+ reluctance to raise output, the market is ill-equipped to fill the supply gap,” Harry Tchilinguirian, global head of commodity markets strategy at French bank BNP Paribas, told the Reuters Global Oil Forum on Tuesday.
OPEC+ is the name given to the group of oil producers, including non-OPEC supplier Russia, that agreed to curtail output starting in 2017.
While Britain, China, France, Germany, Russia and Iran on Tuesday said they were determined to develop payment mechanisms to continue trading despite the sanctions by the United States, most analysts expect Washington’s actions to knock between 1 million and 1.5 million barrels per day (bpd) of crude oil supplies out of markets.
“We view Brent’s rally above $80 per barrel as fundamentally justified,” said Fitch Solutions in a note.
US President Donald Trump has demanded that OPEC and Russia increase their supplies to make up for the expected fall in Iranian exports. Iran is the third-largest producer in OPEC.
OPEC and Russia, however, have so far rebuffed such calls.
“Any formal decision on oil output by the producer group, barring an extraordinary meeting, will only take place at the December meeting. Thus, the window period for oil prices to potentially extend gains is quite wide as Iran loses exports and OPEC+ remains on standby,” Tchilinguirian said.
Ashley Kelty, oil analyst at financial services firm Cantor Fitzgerald said crude could soon hit $90 per barrel.
“We don’t believe OPEC can actually raise output significantly in the near term, as the physical spare capacity in the system is not that high,” Kelty said.
Bank of America Merrill Lynch has lifted its average Brent price forecast for 2019 from $75 per barrel to $80, while it increased its WTI crude oil forecast by $2 to $71 per barrel.
The bank said “the Iran factor may dominate the market near-term and cause a (crude price) spike,” although it added that emerging market “demand concerns could reappear thereafter.”
Indian refiners — struggling from high crude feedstock prices and a sliding rupee — are planning to reduce oil imports in what could be a first sign that high prices are starting to hurt demand.
Despite the bullish sentiment, some traders said current prices already reflected the tighter market, and that more oil would be coming in 2019.
Commodity trading giant Vitol said on Tuesday that non-OPEC producers, especially the United States, may insert up to 2 million bpd of new crude into the market in 2019.
To reflect rising US oil exports, CME Group Inc. said on Monday it will launch a WTI Houston crude futures contract in the fourth quarter.
CME’s announcement comes after rival Intercontinental Exchange said in July it would offer a Houston crude futures contract.


Gulf defense spending ‘to top $110bn by 2023’

Updated 15 February 2019
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Gulf defense spending ‘to top $110bn by 2023’

  • Saudi Arabia and UAE initiatives ‘driving forward industrial defense capabilities’
  • Budgets are increasing as countries pursue modernization of equipment and expansion of their current capabilities

LONDON: Defense spending by Gulf Arab states is expected to rise to more than $110 billion by 2023, driven partly by localized military initiatives by Saudi Arabia and the UAE, a report has found.

Budgets are increasing as countries pursue the modernization of equipment and expansion of their current capabilities, according to a report by analytics firm Jane’s by IHS Markit.

Military expenditure in the Gulf will increase from $82.33 billion in 2013 to an estimated $103.01 billion in 2019, and is forecast to continue trending upward to $110.86 billion in 2023.

“Falling energy revenues between 2014 and 2016 led to some major procurement projects being delayed as governments reigned in budget deficits,” said Charles Forrester, senior defense industry analyst at Jane’s.

“However, defense was generally protected from the worst of the spending cuts due to regional security concerns and budgets are now growing again.”

Major deals in the region have included Eurofighter Typhoon purchases by countries including Saudi Arabia and Kuwait.

Saudi Arabia is also looking to “localize” 50 percent of total government military spending in the Kingdom by 2030, and in 2017 announced the launch of the state-owned military industrial company Saudi Arabia Military Industries.

Forrester said such moves will boost the ability for Gulf countries to start exporting, rather than purely importing defense equipment.

“Within the defense sector, the establishment of Saudi Arabia Military Industries (SAMI) in 2017 and consolidation of the UAE’s defense industrial base through the creation of Emirates Defense Industries Company (EDIC) in 2014 have helped consolidate and drive forward industrial defense capabilities,” he said.

“This has happened as the countries focus on improving the quality of the defense technological work packages they undertake through offset, as well as increasing their ability to begin exporting defense equipment.”

Regional countries are also considering the use of “disruptive technologies” such as artificial intelligence in defense, Forrester said.

Meanwhile, it emerged on Friday that worldwide outlays on weapons and defense rose 1.8 percent to more than $1.67 trillion in 2018.

The US was responsible for almost half that increase, according to “The Military Balance” report released at the Munich Security Conference and quoted by Reuters.

Western powers were concerned about Russia’s upgrades of air bases and air defense systems in Crimea, the report said, but added that “China perhaps represents even more of a challenge, as it introduces yet more advanced military systems and is engaged in a strategy to improve its forces’ ability to operate at distance from the homeland.”