Iran isn’t the only threat to oil market stability

Iran isn’t the only threat to oil market stability

Too much have been said in recent days about the impact of a new round of US sanctions on the Iranian oil sector. 
No doubt that any sanctions on Iran oil shipments will lead to higher oil prices, but Iran isn’t the only source of risk nowadays.

There are other OPEC members beside Iran who are of great concern to the market now as they all face political and technical risks that is affecting their production.
Venezuela is the big one followed by Libya and Nigeria. Angola is another OPEC country that is struggling to keep its output stable but it is getting less attention from the media and the international oil trading community.

So how far are these countries from a major supply disruption that will affect prices and the balance of the oil market? 
It differs from one to another.

 Iran seems to be at the forefront because on May 12 US president Donald Trump is expected to decide whether to renew the oil sanctions waivers on Iran or impose sanctions on the country instead.

Assuming that President Trump opts for sanctions, it is expected that the country’s oil shipments to its major customers such as the EU, China, India, Japan, South Korea and Turkey will decline by half a million to 1.2 million barrels per day (bpd) based on various estimates from leading international banks.

Oil prices in this case would jump by another $5 to hover around $80 for the Brent benchmark. The effects of such a price level on market balance is yet to be seen as some analysts are expecting some disruption to demand while others say that demand will remain strong this year with oil at or below $80.
Turning to Venezuela, the political situation there is still unclear as the country will hold its presidential elections on May 20. 

Even if Trump didn't impose sanctions on Iranian oil exports, the risk for the market to turn into deficit in the second half of the year is high.

Wael Mahdi

Many countries are watching the elections closely and the US may impose sanctions on the country’s oil sector if the results are viewed as illegitimate. 

Yet the oil production situation in Venezuela is not good whatever happens on election day.
Crude output is in steep decline. According to OPEC’s secondary sources estimates, production averaged 1.54 million bpd in first quarter of 2018, down from 1.77 million in the fourth quarter of last year. 
With no fresh investments and with many international oil companies fleeing the country (the last was Chevron after the arrest of two of its staff there), the situation there is headed to the unknown and some banks are expecting to see output at 1.2 million or even 1 million bpd by end of this year.
Libya, which has set a production target of 1.25 million bpd this year, is no better than Venezuela and others as its output is still fluctuating below 1 million bpd due to attacks on its oil facilities. 

Its officials, however, are still sending positive signals at every OPEC convention they attend.
Libyan officials are still asking for OPEC support and they still expect to see production ramping up higher although other ministers of OPEC and non-OPEC believe that the country won’t deliver more than 1 million bpd this year.

The impact of Libya and Venezuela on oil prices is also another $2 to $5 in the form of a risk premium, making $80 per barrel for Brent a high possibility.
The story of oil production in Angola, the second largest oil producer in West Africa, is getting less attention from the international oil community.

 This country is seeing steep decline in its production for some time and its shipments to China is reflecting that situation. Angola which was always among the top three suppliers of crude to China, has shipped 2.9 percent less crude to the Asian country in the first quarter compared to a year ago. 
Angolan production in the first quarter of this year averaged 1.57 million bpd down from 1.64 million bpd in the fourth quarter of 2017.
Angolan crude oil is facing a hard time in Asia. Its crude is linked to Brent which is now at the highest level since 2014. Other crude that is linked to Dubai or WTI is becoming less expensive. Thus, Angolan oil exports will drop this month to the lowest in seven years according to loading programs. 
So while OPEC and non-OPEC members of the Joint Ministerial Monitoring Committee (JMMC) were still talking about a small surplus in the market and expressing their concerns over the remaining overhang in inventories, the reality is different. 
A supply deficit is looming and the source of this is OPEC countries.

The JMMC has reported that the compliance level of the 24 countries who are voluntarily cutting their production under a global agreement, was at a record high of 149 percent as of end of March. 
Part of this is due to the deteriorating supply situation in countries like Angola and Venezuela, which is becoming worrying.
Even if Trump didn’t impose sanctions on Iranian oil exports, the risk for the market to turn into deficit in the second half of the year is high knowing that short-cycle investments in US shale oil production won’t help because there is not enough infrastructure in the US to carry and transport any increase in crude production from shale oil basins. 
In the best case scenario, US shale oil producers can add another 200,000 to 300,000 bpd this year, but that is not enough to offset big declines from OPEC.

The only country that can produce more at the moment is Saudi Arabia, but with the summer months approaching and new supply agreements being signed with Poland and China, the pressure on Saudi oil fields will be immense. The country can easily add another one million barrels a day of crude oil this year but that will mean the end of the current production cuts agreement.

The best solution may be to revise the deal in June when OPEC and its allies next meet in order to give some flexibility for members to raise production in case of a deficit. 
But many ministers are still debating that $70 oil isn’t enough for investments so seeing oil at $80 maybe plausible to them. Others are saying that $60 to $70 is a good price for oil this year. Striking a balance between these two price ranges is not going to be an easy task.

  • Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view