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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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A New Era Of Geopolitical Risk In Global Oil Markets

Amid never ending talk and speculation over how many more barrels of Iranian oil will be removed from global markets once sanctions slated to hit Iran’s oil production on November 6 take effect, some are claiming that geopolitical factors have driven the market just as much as supply fundamentals.

At Russia Energy Week in Moscow last week, both Saudi and Russian energy ministers said they see rising geopolitical risk as driving the recent oil price increase at a time when there is sufficient supply in the market. Of course, the notion of sufficient supply will be tested soon, as will both Saudi Arabia’s and OPEC’s spare production capacity will be called on to maintain this supply.

"Prices are continuing to rise and I think that proves the point that it is not the fundamentals of oil supply and demand that is behind this price increase," Saudi energy minister Khalid al-Falih said on Thursday during the conference.

"The market has a strong influence,” he added. “Financial investors, speculators, sentiment, future expectations. The true elephant in the room is geopolitics. That has all combined to feed the market frenzy.”

Following al-Falih’s cue, Russian energy minister Alexander Novak agreed that geopolitical risks were having a disproportionate impact on global oil prices, which have recently breached new four-year highs.

On Friday, global oil benchmark London-traded Brent crude futures dipped slightly but still settled at a robust $84.33 per barrel, a price point that could arguably mark the beginning of supply disruption in developing economies where a strong U.S. dollar and rising oil prices are already creating economic woe, especially in Asia, including the Philippines, Vietnam and India.

Novak added that "the [oil]price today, in my opinion, reflects very significant uncertainty and risks, and in this sense the market is not yet balanced."

Related: “Profit Secrets of the World’s Most Successful Energy Investors”

However, going forward, supply and demand fundamentals, particularly the supply side of the equation, will be the shaker and mover of any future ramp up in global oil prices. Not only does the market have the jitters about less Iranian oil hitting the market, a development that is already unfolding at an accelerated pace, but persistent production problems in Nigeria, Libya and Venezuela (all OPEC members) remain, causing many to forecast Brent to breach $100 per barrel by next year.

This price point would be an unwelcome New Year’s gift that would throw more cold water on global economic growth, particularity in developing markets. Crude oil price increases could also slow stellar U.S. economic growth, admittedly a bragging point and point of vulnerability for the Trump White House as the 2020 presidential election cycle nears.

The ongoing trade war with China could also marginally impact U.S. economic growth, but not to the same extent as a period of prolonged higher oil and gasoline prices which can wreak havoc on both industry and consumers alike.

China is also a swing factor in on the demand side of the Iranian (therefore global) oil equation, with Chinese state-run oil major and Asia’s bigger refiner Sinopec indicating two weeks ago that it would actually bow to pressure from the Trump Administration and cut Iranian oil imports by as much as half in October.

Sources that spoke to Reuters about the matter didn’t specify volumes but based on the prevailing supply contract between Sinopec and the National Iranian Oil Company (NIOC), Sinopec will reduce its loadings to about 130,000 barrels per day (bpd), equaling 20 percent of China’s daily average imports from Iran in 2017 - the deepest Chinese cut in Iranian oil exports in years.

This would be 20 percent of China’s average daily imports from Iran in 2017, the report added, dealing a blow to Tehran, which has counted its top oil client to maintain imports while European and other Asian buyers wind down purchases to avoid U.S. sanctions.

By Tim Daiss for Oilprice.com

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