Much of the current oil price rally – up about 50 percent in less than two months – is due to the growing optimism in the markets. That is, the price surge is driven by speculative movements, bets that oil prices will rise.
However, the speculators are not entirely off base. While the underlying fundamentals still look pretty grim, there are some tangible impacts taking place in the world of oil supply and demand that are contributing to that bullish sentiment. First, probably the most closely watched stream of data comes from U.S. shale, which is posting steady declines each week.
But more recent data shows unexpected supply outages from several OPEC members, disruptions that have trimmed the group’s collective output by nearly 200,000 barrels per day.
Iraq lost somewhere between 260,000 and 320,000 barrels per day in February, according to OPEC data. The IEA estimated that Iraqi oil production fell by a more modest 210,000 barrels per day in February compared to a month earlier. To be sure, Iraq hit an all-time high in January at 4.43 million barrels per day (mb/d), and still is producing nearly 900,000 barrels per day more than a year ago. But the outage is not trivial.
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A pipeline outage in Kurdistan temporarily knocked off 600,000 barrels per day beginning on February 17, a pipeline that runs from Iraq to the Mediterranean port of Ceyhan in Turkey. According to Reuters, Turkey’s energy minister said that the pipeline was originally shuttered on February 17 due to security concerns, and that the pipeline was subsequently damaged by an attack from PKK rebels on February 25. However, the PKK denies it participated in any attack. In any event, Turkey began repairs on the pipeline, which it estimated would take a few weeks.
The outage put Kurdistan in a serious bind. The semi-autonomous region in Northern Iraq depends on oil exports for the bulk of its revenue. The Turkish government reportedly sent $200 million to the Kurdish Regional Government (KRG) to tide it over during the outage. The pipeline resumed operations on March 11.
Supply outages are not just occurring on the Turkish side of the border with Iraq. The Iraqi central government halted some oil flows through the pipeline to put pressure on the KRG, a move related to its political standoff with Baghdad. The KRG previously agreed to export oil under the auspices of the Iraqi central government in exchange for national revenue sharing. The deal broke down in acrimony, however, with both sides blaming the other. Reuters reported that the Iraqi state-owned North Oil Company held back 150,000 barrels per day as of March 14, a decision apparently made to gain leverage over the KRG.
Elsewhere, supply outages also hit OPEC’s output in February. Nigeria reported a substantial supply disruption when its Trans Forcados pipeline was bombed, forcing the pipeline’s operator, Shell Petroleum Development Corporation to declare force majeure. The damaged pipeline has led to the loss of 250,000 to 300,000 barrels per day of Nigerian oil.
Between Iraq and Nigeria, the markets saw 850,000 barrels per day temporarily knocked offline between January and February. The losses were partially offset by the ongoing ramp up in oil production in Iran, which added nearly 200,000 barrels per day in February, bringing its total to about 3.2 mb/d.
But with global markets oversupplied by between 1.5 and 1.9 mb/d, the supply outages took a bite out of the glut (again, perhaps only temporarily).
Separately, the markets are putting too much hope into the OPEC meeting in April in Doha, a summit where top OPEC members hope to hash out the production freeze agreement with Russia. Oil prices have repeatedly bounced whenever positive news emerged related to the meeting. However, even if the negotiators agree to a freeze, it will matter little. All participants are at their practical limits for production. Even Iraq, which theoretically has significant room to grow, does not anticipate production gains this year.
Due to its hollowed out budget, the Iraqi oil ministry has requested that international companies operating Iraqi fields trim their spending budgets. Without resources to the pay the companies, the ministry says it will spend “a little more than $9 billion,” sharply lower than the $23 billion proposed by the group of companies, and also down from 2015 spending levels of $13 billion. In other words, regardless of OPEC’s production freeze, Iraq will likely see output remain flat, and possibly even fall, due to a sizable drop off in investment.
Moreover, Kurdistan has been hit with repeated bouts of bad news. Aside from the pipeline outage through Turkey and its political stalemate with Baghdad, Kurdistan also suffered a blow when Genel Energy slashed its oil reserves in half in early March. The oil producer is one of a handful of foreign companies that produces in Kurdistan, and after assessing the Taq Taq oil field, Genel downgraded its reserve base from 683 million barrels to just 356 million barrels. Adding insult to injury, on March 18, Genel quietly trimmed 8 percent from its probable and proven reserves total from the Tawke field, another one of its oil assets in Kurdistan.
In short, unexpected geopolitical events are putting upward pressure on oil prices, just as they used to in years past before the glut. Global markets remain oversupplied, but while all eyes are on the cutbacks in U.S. shale, several OPEC members are actually suffering meaningful supply outages.
By Nick Cunningham of Oilprice.com
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