The risk of oil supply disruptions from around the world has diminished, and rising non-OPEC production provides a “solid base from which to react to any escalation in geopolitical tension.”
In its January Oil Market Report, the International Energy Agency (IEA) said that there is plenty of oil sloshing around, despite the U.S. and Iran nearly going to war. “We cannot know how the geopolitical situation will play out over time, but for now the risk of a major threat to oil supplies appears to have receded,” the IEA said. “As was the case following the attacks on Saudi Arabia in September, once the initial fears of a sustained supply shock subsided, the Brent price rapidly gave up its $4/bbl spike.”
Oil inventories held in OECD countries is 9 million barrels above the five-year average, and there are also plenty of strategic stockpiles to call upon in the event of an outage, the agency said.
Still, while geopolitical risk has “faded,” it has not gone away entirely. The Trump administration may have refrained from all-out war against Iran, but the assassination of General Soleimani took the confrontation to new heights.
While Trump’s speech earlier this month was widely interpreted as one of “de-escalation,” he also prefaced his comments by saying Iran would never have a nuclear weapon. But, sanctions, “maximum pressure,” and the assassination of one of its top leaders will obviously provoke a response. With little left to lose, Tehran is backing out of most of its commitments under the 2015 nuclear agreement, a deal that the U.S. already exited nearly two years ago. Related: The U.S. Natural Gas Boom Is On Its Last Legs
All of which is to say the countries are seemingly locked on a collision course. The world breathed a sigh of relief when the two countries backed away from the brink, but there are decent odds that the conflict flares up again in the not-so-distant future. There are few pathways for actual de-escalation, absent an overhaul of U.S. policy.
At the same time, Iran has already lost much of its oil supply due to sanctions. So, the additional supply risk is concentrated in Iraq, where the U.S. and Iran conflict is actually playing out. “Recent events have shown that Iraq is a potentially vulnerable supplier, just as its strategic importance has grown,” the IEA said. The agency noted that Iraqi oil exports have doubled since 2010, from 2 million barrels per day (mb/d) to 4 mb/d. China and India each import roughly 1 mb/d of supply from Iraq.
“Iraq’s rising capacity has been very welcome as sanctions have reduced Iran’s exports to only 0.3 mb/d and Venezuela’s production has collapsed,” the IEA wrote. Left unsaid was that those outages were both the result of U.S. sanctions. Related: Iran Regime Change Could Push To $40 Oil
Putting aside the geopolitical risk, the agency said that prices will likely remain subdued this year because non-OPEC supply continues to grow faster than demand. Non-OPEC countries will add 2.1 mb/d this year, while demand will rise by 1.2 mb/d.
Unlike in previous years, U.S. shale won’t dominate the supply growth picture, at least not entirely. The sector will likely see a “marked slowdown,” accounting for 52 percent of non-OPEC supply growth, down from an 84 percent average between 2017 and 2019. Instead, Norway, Brazil, Canada, Australia and Guyana will add new barrels.
The bottom line is that OPEC+ still faces a predicament. “Even if they adhere strictly to the cuts, there is still likely to be a strong build in inventories during the first half of 2020,” the IEA said. “OPEC crude production would fall to 29.3 mb/d in January if there were to be full compliance and steady output from Libya, Iran and Venezuela. That is still 700 kb/d above the 1Q20 call on OPEC crude and 900 kb/d above the 2Q20 call.”
In other words, unless OPEC+ cuts further, the oil market faces persistent oversupply in the first half of this year.
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By Nick Cunningham of Oilprice.com
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The glut has been big enough to undermine OPEC+ production cuts, nullify the impact of geopolitics and outages on oil prices and even absorb the shock of Saudi loss of its production and the recent mutual retaliation between the US and Iran.
That is why oil prices ranged from $60-$66 a barrel in 2019. Until the glut is sharply depleted in 2020, it could continue to overshadow geopolitical risks in 2020.
However, a continued de-escalation of the trade war is bound to accelerate the depletion of the glut thus invigorating not only the impact of geopolitics on prices but also prices which could be projected to average $73-$75 in 2020.
The most important geopolitical risks in 2020 could come from two sources. The first is that Iran’s retaliation against the killing of its most important military leader is not over yet. Iran’s strategy in coming days and months will aim to force the eviction of American forces from Iraq. Losing Iraq will be a significant strategic victory for Iran. This will be eventually followed by the withdrawal of all American forces from the Middle East.
The other geopolitical risk emanates from the fact that Saudi oil installations will remain hostage to Iran’s allies, the Houthis as long as the war in Yemen continues or as long as Iran wants them threatened.
And while Iraq has become a battleground between Iran and the United States for influence, I don’t think Iraq’s oil production will be affected. However, it might become risky for American and western oil companies to operate in Iraq as long as there are calls for the eviction of American military presence. Chinese and Russian oil companies would continue to operate peacefully in the country helping Iraq to reach its full oil potential. Currently Iraq is exporting
4 mbd.
And despite disinformation by the International Energy Agency (IEA), Iran is still exporting 60%-70% of its crude oil to China, India, Turkey and the European Union (EU). And also despite intrusive US sanctions, Venezuela has managed to increase its oil production with help from China and to sell its oil worldwide and also get paid with help from Russia.
Non-OPEC oil supplies will be almost 1-2 mbd less in 2020 than in 2019 because of the continued slowdown of US shale oil production and a continued decline in Norway’s oil production. Brazil can’t increase production for at least a few more years because of the extremely difficult terrain in which its pre-salt reserves lie and the cost of production. Canada’s exports are seriously limited by lack of pipelines while Guyana’s oil exports small as they are will not materialize until the end of this year.
And despite hype by the US Energy Information Administration (EIA), US oil production is overstated by at least 2 million barrels a day (mbd) and, therefore, US production is projected to decline to under 10 mbd or in 2020.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London