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When a crude deal is not enough

Updated July 01, 2018

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In this file photo, the Opec logo is pictured ahead of an informal meeting between members of the Organisation of the Petroleum Exporting Countries in Algiers.—Reuters
In this file photo, the Opec logo is pictured ahead of an informal meeting between members of the Organisation of the Petroleum Exporting Countries in Algiers.—Reuters

The markets are in for a crude ride. New variables are on the horizon which must be factored in the overall global crude equation. The hard line taken by the Trump administration towards Iran is disrupting calculations and the overall balance of an already over stretched market.

The Trump administration seems determined to elbow out most Iranian oil from markets by November 4. Analysts are of the view that if the US is successful at convincing most from buying Iranian oil, outages could rise to as high as 2 million barrels per day (bpd). This is more than what markets are geared up to balance, at this moment.

President Donald Trump’s sustained bid to disrupt Iran’s petroleum exports could soon help to push oil prices above $90 a barrel, analysts told CNBC on Thursday. We are already on the brink of the 80s. “We are in a very attractive oil price environment and our house view is that oil will hit $90 by the end of the second quarter of next year,” Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch was quoted as saying.

Having failed to persuade the other parties to the Iran nuclear deal to abandon it, Trump has decided instead to bully them into acting the way he wants, Julian Lee points out in his Bloomberg column. Anyone buying Iranian crude by November can expect to be shut out of the US banking system.

Others issues are also lining up — stretching the balance further. Libya’s oil production has fallen by 400,000 bpd after an attack on two of its biggest export terminals. The destruction of two more storage tanks will probably have a long-term effect on exports. Add to that, the loss of 350,000 barrels a day from Canada after a transformer blew up at Syncrude Canada’s oil-sands upgrader in Alberta and further declines in Venezuela, and it is easy to see another million barrels a day of outages. All these need to be offset, Lee underscored, besides indeed the impact of the Iranian embargo.

The US was clearly not satisfied with the Organisation of Petroleum Exporting Countries (Opec) decision last week. It wanted the Opec to “do more.”

Immediately after the moot, the US Energy Secretary Rick Perry emphasised that the deal between global oil producers to boost crude output was not enough to relieve global oil markets that are stressed by supply constraints. “Obviously we’ve got a market that is stressed from a standpoint of supply,” Perry told reporters. The rise in prices, in the immediate aftermath of the Opec accord, indicated the agreement “may be a little short” of what is needed, he added.

In the meantime, besides Saudi Arabia, the US appeared to be exerting pressure on Russia to increase output. As one of the top two oil-producing countries, US officials have been urging Russia and also other exporters to increase their output.

CNBC quoting analysts is reporting that despite thorny US-Russia relations, the US Energy Secretary Rick Perry may have asked the Russian Energy Minister Alexander Novak in their meeting in Washington last Tuesday to increase output more than envisaged in its deal with Opec.

Riyadh is also under immense pressure from several ends. The political pressure from the Trump administration is evident too. In the given geopolitical circumstances, it cannot remain oblivious to the demands of the US. In the circumstances, Saudi Arabia had to act. And act it did.

An industry source familiar with Saudi oil production plans told Reuters last Tuesday that Riyadh planned to pump up to 11m barrels of oil in July, the highest in its history, up from about 10.8m bpd in June. The increase, if it can be pulled off, would be an incredibly rapid ramp-up in output — up more than 1m bpd from May levels.

How this plan fits into the Opec deal remains to be seen. It was only a few days ago that Saudi Arabia and its coalition partners said they would add 1m bpd of supply back onto the market, with many of them acknowledging that, in reality, the figures would be closer to 600,000 bpd.

As such, the addition of 1m bpd from Saudi Arabia alone would lead to the Opec exceeding the production levels they just committed to, after factoring in additions from Russia and the other Gulf States.

In the wake of political pressure and stretched market balance, the Opec accord seems to unravel, that too within a few days. And this may carry long-term consequences for Opec as a group.

Published in Dawn, July 1st, 2018