Oil prices spiked immediately after the U.S. killed Iranian General Qassem Soleimani on Thursday. Soleimani, as head of the Quds force of the Revolutionary Guard, was a very powerful Iranian official, often likened to a shadow foreign minister. Iran promised “severe retaliation,” and many analysts fear a broader regional war. At a minimum, attacks on U.S. military installations in the Middle East are expected. Brent prices shot up by more than 3 percent.
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Friday, January 3rd, 2020
U.S. oil workers leaving Iraq. Dozens of workers in the southern oil fields in Iraq are leaving the country and the American embassy urged all U.S. citizens to leave the country immediately. Iraqi officials said production would not be affected.
Supply risks? The big question at this point is how Iran might respond. Rapidan Energy said that the vessels and oil facilities are at risk. “[T]he risk of another major attack against Gulf oil vessels or facilities is now above 50%,” the firm said.
Equity markets sink on attack. Equity markets fell after the attack on Soleimani, interrupting the bullish mood for stocks. The conflict could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the U.S.-China trade war,” Valentin Marinov, head of G-10 currency research at Credit Agricole SA, told Bloomberg. “Risk sentiment should remain fragile also because central banks may be slow to respond or simply no longer have the arsenal to respond in an adequate way.”
$200 billion in shale debt due in next four years. Roughly $200 billion in North American oil and gas debt will mature in the next four years, according to the Wall Street Journal, which includes $41 billion due this year. More than 200 companies have already filed for bankruptcy since 2015, but that number will continue to rise as drillers struggle amid the crushing weight of debt. The huge obligations will force drillers to cut spending, potentially bringing the shale boom to a halt.
Russia’s oil production hits post-Soviet record. Russia appears to be defying the OPEC+ deal, ramping up production to a new post-Soviet record high last year. According to Bloomberg, output exceeded its agreed upon limit in 9 out of 12 months in 2019. Related: China Grants Export License To Teapot Refiners
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Greece, Israel and Cyprus agree on gas pipeline. Greece, Cyprus and Israel signed a deal to build a 1,180-mile subsea pipeline that will move natural gas from the Eastern Mediterranean to Europe. The agreement aims to have a final investment decision by 2022, with the pipeline aiming for completion by 2025. The project is opposed by Turkey, however.
Problems with new IMO compliant fuel. Reuters reports that some routine tests have turned up problems with new low-sulfur fuels. The new IMO rules took effect on January 1, requiring lower sulfur concentrations. The rules are expected to cut 77 percent of sulfur oxide emissions from the sector. But the implementation could be a bit rocky at first. Marine fuel suppliers “are struggling with sediments,” a specialist told Reuters.
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India to import 90 U.S. LNG cargoes. India’s state-owned utility GAIL plans on importing 90 LNG cargoes in FY 2020-2021, double the volumes from the current fiscal year, according to S&P Global Platts.
Tullow Oil falls again on bad Guyana result. Tullow Oil (LON: TLW) briefly plunged by 20 percent after it reported disappointing drilling results in Guyana, before seeing its share price rebound to post just a 6 percent loss on Thursday. “Expectations were high going into this,” David Round, an analyst at BMO Capital Markets, told Bloomberg. “There will be a level of disappointment about the size.” The bad result comes just weeks after Tullow lowered its forecast for its Ghana operations, sending its share price careening down. Tullow is now trading at about $60 per share, down by more than two-thirds from over $200 per share as recently as November.
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Hess best 2019 performer. Hess (NYSE: HES) was the best performer in the S&P 5000 Energy Index last year, rising by 65 percent. This is largely due to its success as a partner of ExxonMobil (NYSE: XOM) in Guyana. The first phase of production came online in December. Related: Why The Saudis Suddenly Agreed To This Mega Oil Deal
EVs in Norway reach 42 percent. EVs captured 42 percent of the market in Norway last year, up from 31 percent the year before. Norway was already the world’s largest EV market per capita, and the country aims to have zero emissions cars make up all new sales by 2025.
Permian pipeline glut. Five new oil pipelines are set to open in the Permian in the next two years, which could add as much as 3.5 mb/d in midstream capacity on top of the current 6 mb/d, way above upstream production, which currently stands at 4.72 mb/d. Pipeline companies are in cutthroat competition, cutting rates to attract interest. “There is a chance that some of the projects would get canceled or consolidated and that would depend on shipper commitment,” Sandy Fielden, director of research for Morningstar Inc., told Bloomberg.
Tesla delivers record 112,000 cars, meets sales goal. Tesla (NASDAQ: TSLA) delivered 112,000 vehicles globally in the fourth quarter, topping Wall Street estimates. That allowed the company to meet its sales goal of 360,000-400,000 for the year.
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One thing the world should be sure of is that Iran will retaliate but in a measured way to hurt the United States badly but not to lead into a war between them.
Moreover, American citizens in the Middle East will never be able to show their faces again and they will be under immense pressure to leave particularly the oil workers operating in Iraq.
Iran’s retaliation could translate into one of these measures.
1- Iran will exert maximum pressure on the Iraqi government to demand the full withdrawal of all US forces from Iraq. This is something the assassinated General Soleimani has been working on. But with a weak government in Baghdad, the prospect of it happening is low.
2- It could order its militia in Iraq to ransack the American Embassy in Baghdad and take some American diplomats hostages. This will lead to a massacre as the American Embassy in Baghdad is well defended. However, any massacre will expedite the departure of the American troops from Iraq.
3- Iran could also order its militia in Iraq to attack American forces and kill or take some hostages.
4- Alternatively, Iranian militia operating in Syria could attack American forces occupying Syria’s oilfields in the Deir Ezzor region and try to kill or take some American troops hostages.
5- Iran could also order its allies in Yemen, the Houthis, to attack highly sensitive Saudi oil installation like Ras Tannura loading terminal on the Gulf with the aim of crippling Saudi oil exports and precipitating a global oil crisis.
And while oil prices have risen by more than $2 a barrel in the aftermath of the American attack, the global oil market is well supplied with oil particularly as a result of a huge glut which has been augmented to an estimated 4.0-5.0 million barrels a day (mbd) by two years of trade war between the US and China.
Sill if Iran’s retaliation really hurts the United States, then there is a real possibility that the conflict could get out of hand and escalate into an armed conflict. In such a situation, prices could rocket particularly with Iran threatening to block the Strait of Hormuz.
Short of a war between the two countries, oil prices will return to around $66-$67 a barrel after the Iranian retaliation.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London