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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The One Region Oil Markets Can’t Ignore In 2020

The year that is drawing to its close has been turbulent for the Middle East. While oil prices stubbornly refused to respond to efforts to push them higher, remaining locked in a tight and not particularly pleasant range, a number of attacks heightened tensions in the region and made many warn that the animosity between Saudi Arabia and Tehran could escalate to an open military clash. Will 2020 be any different?

For oil prices, hardly. The International Energy Agency said earlier this month it expected a 700,000 bpd overhang in global oil supply during the early months of the new year. Then last week Russia’s Energy Minister Alexander Novak said he expected OPEC+ to discuss relaxing the deeper production caps it just agreed to at a meeting in March.

While a discussion does not mean a relaxation, the very possibility of reversing some or all of the additional cuts just three months after OPEC+ agreed them is enough to add pressure to prices.

In more pressure for oil prices, Saudi Arabia and Kuwait finally reached an agreement for the restart of operations at two shared oil fields in the neutral zone between the two countries. The production capacity of the fields is half a million barrels daily, The National reported, quoting a Refinitiv analyst who also added that while it will be a while before the effect on oil prices is felt, it will be felt eventually. Related: Bullish Sentiment Remains Despite Oil Price Dip

"The addition of 100,000-200,000 barrels of heavy sour will not be felt in the beginning but once it starts moving towards 300,000 bpd, it might pose a problem for Opec+," Ehsan Ul-Haq told the Emirati daily.

As for the geopolitical situation, the events from this year have strongly suggested that an open confrontation led by Saudi Arabia and Iran is highly unlikely. There were tanker attacks that the Saudis—and the U.S.—blamed on Iran. There were tanker arrests and exchanges between Iran and the UK. Freight rates for the Strait of Hormuz jumped as tanker insurance rates skyrocketed and a number of countries set ships to patrol the world’s biggest oil chokepoint.

Finally, there were the attacks on Saudi oil production that were for many the highlight of the year on oil as they temporarily took 5.7 million bpd in production capacity off the market. Even these attacks, for which Riyadh and Washington blamed Tehran despite the Yemeni Houthis claiming responsibility, did not tip the two biggest powers in the Middle East into an open war.

Bloomberg reported this week, citing Citi analysts, that “Geopolitical disruption risk has not disappeared” in the Middle East and yet this risk has been “heavily discounted by markets, which look to us to be more vulnerable to disruption.”  Related: Why Hasn’t Hydrogen Gone Mainstream?

This does not bode well for the oil-dependent economies in the region. With many still struggling to return to growth in the absence of high oil prices, Fitch has forecast deficits for some may even deepen next year if oil prices fall further. This, in turn, will aggravate social and political problems already brewing because of high unemployment and bad governance, Bloomberg’s Netty Ismail wrote, quoting a Fitch Ratings director.

“Reforms to stabilize public and external finances in both oil importers and some exporters risk further social and political backlash,” Krisjanis Krustins said.

This problem could be particularly worrisome for Saudi Arabia if Aramco’s shares don’t live up to the promise of solid returns. A lot of ordinary Saudis borrowed money to buy into the state oil giant, and if they lose this money or fail to make a profit on them, Ryiadh may have a bigger problem than oil prices on its hands.

By Irina Slav for Oilprice.com

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