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Is The Geopolitical Risk Premium In Oil Overrated?

While geopolitical risk definitely remains…

Osama Rizvi

Osama Rizvi

Osama is a business graduate and a student of international relations. Currently working as freelance journalist, covering commodities and geopolitics.Osama is a regular contributor at 'Modern Diplomacy'…

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The Five Countries Threatening OPEC Unity

OPEC

As an apparent wave of populism sweeps through the world, Theresa May prepares to trigger Article 50, and fears of a trade war between China and the U.S grow, financial markets are on edge. But alongside this uncertainty, there has been some good news for markets as well, with oil markets moving towards rebalancing. The recent OPEC production cut agreement, and the additional cuts by non-OPEC countries caused oil prices to touch a post-2014 high. But Saudi Arabia and Russia, among other oil producers, are now in the limelight, as the world waits to see how true to the agreement each country will remain. Perhaps more important at this point are those countries who were never part of the agreement, or who were absolved from it.

One such country is Libya; its rising oil supply can easily offset the effect of the proposed production cut. Recently, oil exports from Libya's key oil terminals Es-Sider and Zueitina were resumed. This could bring 270,000 bpd back to the market, which is just a taste of how Libya, if peace prevails, could increase its production. The addition of 270,000 barrels alone accounts for almost a quarter of the OPEC production cut.

Related: Natural Gas Drillers Rush To Hedge Production As Prices Soar

The second country is Iraq. Iraq fought hard to be exempted from any sort of cut or freeze, arguing that it needed money “to fight ISIS”, and while it eventually accepted a cut, the risk of this huge oil nation cheating on the deal is significant. Iraq’s output has grown at an alarming rate this year and the recently signed a deal with Lukoil, the Russian energy giant, to tap into the West Qurna-2 reservoir adds to the concerns.

Then there is Iran. Iran was not exempted from the deal but agreed to a production freeze at 3.8 million barrels per day. Like Iraq, Iran has also been busy signing deals with oil giants to ramp up its production. On December 7th Iran and Shell signed a deal to explore three oil and gas fields. Saudi Arabia has always seen Iran as a rival, with Iran being the key reason that Deputy Crown Prince Muhammad Bin Salman refused to sign the deal as put forward earlier in the year. This time around things were different, and matters has grown increasingly serious for Saudi Arabia.

The Kingdom had already borne the brunt of its decision in 2014 to not to cut production. We saw how the country’s masses, accustomed to government largesse in the shape of subsidies, extravagant pay and the leisure of not working, turned against the country’s gerontocracy when pay was slashed, holidays curtailed and subsidies removed. Also, the Foreign Exchange reserves of the Saudis were being depleted at an unprecedented rate. These factors explain the display of flexibility by the Kingdom at the Vienna conference on the 30th of December. On the other hand, prospects for Iran are just opening up after the Obama administration signed the controversial nuclear deal with the Islamic Republic. As the sanctions are being lifted gradually from Iran, it now sees the whole world opening up as a potential market - a temptation that may prove very hard to resist.

The Putin Factor: The appointment of Mr. Rex Tillerson as secretary of State and the various insinuations by the President-elect to lift sanctions could be symptomatic of greater production from Russia. Russia has recently claimed that it will beat 2016’s estimated oil production total of 253 million tons in 2017.

"Supposedly 253.5 [million tonnes of oil are expected to be exported from Russia] this year, which is 4.8 percent more than in 2015. In 2017, we will have a little more than this," Molodtsov said.

Finally, Nigeria. As of now it is busy fighting Boko-Haram and attempting to strike some kind of political deal with the Niger Delta Avengers. Exempted from the oil deal, its production stands around 1.6 mbpd. President Buhari has vowed to increase the production to 2.2mbpd, a statement that will not be welcomed by fellow OPEC producers.

If any of these countries do significantly increase production, then the euphoria that has yet to reach its peak may begin to fade.

By Osama Rizvi for Oilprice.com

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  • Tesla on December 29 2016 said:
    Just noticed that the overwhelming majority of articles on this website is bearish on oil price, ignoring all bullish signs. A great opportunity to be on the long side?
  • osama on December 29 2016 said:
    It is because the over all sentiment, however changed after the Vienna deal, still have uncertainty regatding the sustainability of the oil price hike. The major factor is the fundamentals remains unchanged---but if the deal is carried out honestly the fundamentals might change (the supply side). But the driving force i.e. the demand it remains uncertain hence the bearishness.

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