How international geopolitics is shaping oil price

OPEC


Though the Organisation of Petroleum Exporting Countries (OPEC) and non-members have contributed tremendously to global economy, especially the oil prices, the cartel may continue to contend with rising forces, which will affect oil price.

While the law of demand and supply, as well as sentiments remains basic determinants of future of crude oil, other factors are increasingly dousing and heightening the volatility in the market. This is because crude oil prices have continued to play greater role in global economy.

Reportedly, oil price slump from a peak $115 per barrel in June 2014 to around $35 in February 2016 is one of the most important global macroeconomic developments of the past three years.

In November 2016, OPEC and 10 non-OPEC countries agreed to cut crude oil output by 1.8 million barrels bpd. The pact, which started on January 1, 2017, saw OPEC alone cutting about 1.2 million bpd while Nigeria and Libya were exempted. Upholding the cut in 2017, the group had recently gone ahead to cap supply into the market till March 2020.

Analysts believe that the production cut helped in reviving oil prices as oil rally the most in almost a decade as the development pushed on prices to over $70 a barrel.

In recent times, increasing oil production in the U.S. has remained a challenge for the future of oil as US President Donald Trump had repeatedly accused OPEC of deliberately hiking prices.

Trade wars between US and countries like China, Iran, Venezuela and others have been reported as key factors affecting oil price rally and indeed the future power of OPEC, bearing in mind that legislation is being debated in the US to ‘outlaw’ OPEC.

The International Energy Agency (IEA) had said global demand for OPEC oil looks bleak and could fall to its lowest in over 16 years as U.S. production share rises as demand from OPEC in the first quarter of 2020 is expected to settle at 28 million bpd.

Apart from the concerns from U.S., rising tension in Middle East has continued to add up to oil price uncertainties. About a month ago, two tankers from Saudi Arabia, one vessel from Norway, and one from United Arab Emirates were damaged by sabotage attacks between the Persian Gulf and Gulf of Oman creating a further uncertainty.

The tension in the region has continued with Britain sending a second warship to the Persian Gulf to respond to the security threat to commercial shipping from Iran. Reportedly, a warship, HMS Duncan is to sail to the region this week to join another warship; HMSMontrose. HMSMontrose intervened in the region two Wednesdays ago to see off Iranian boats trying to impede a British oil tanker in the Strait of Hormuz.

The development pushed oil prices higher last week, though the Gulf of Mexico storm is expected to cause only a brief reduction in the region’s oil and natural-gas production.

There are indications that the 2020 Maritime Regulations of International Maritime Organization (IMO) could deepen the uncertainty in the global oil market. From January next year, IMO is expected to reduce sulfur content in “all marine fuels” from 3.5 percent to 0.5 percent. As estimated, 75 percent of extra capacity refineries need to be built to implement the rules. Analysts said the rule the rule has the potential to drastically transform crude oil demand.

Experts, including vice president, Macro Oils, at Wood Mackenzie, Ann-Louise Hittle, PricewaterhouseCoopers’s Associate Director, Energy, Utilities & Resources, Habeeb Jaiyeola and Chairman/CEO, International Energy Services (IES) Ltd., Dr. Diran Fawibe noted that balancing oil market might remain elusive despite the recent OPEC move.

Hittle said: “Geopolitical risk means the supply outlook is tightening, offsetting the moderate weakening in oil demand growth thus far this year.

“We expect demand to increase to million barrels per day (b/d) in 2019, with a pick-up in the second half of the year after the weak growth in the first half. However, this is at risk if the US increases tariff on its imports from China or other nations and global GDP weakens further.”

To her, worsening tension between U.S. and Iran adds potential for oil price volatility that could be tricky for OPEC members to manage, Hittle noted.“There is a downside risk for oil demand through the rest of the year if the ongoing trade war intensifies.

“Our forecast assumes no further trade war escalation. On that basis, we expect a tightening in the supply and demand balance in the second half of 2019, which supports prices. Brent is forecast to average $68 per barrel for 2019 as a whole, and $69.50/b in the second half of 2019.”

“OPEC compliance is strong, except for Iraq and Nigeria. In May this year, Saudi Arabia had cut its production by more than 0.8 million b/d from its October 2018 reference level. This is far more than required,” she said.

According to her, adherence to quotas is strong from United Arab Emirates and Kuwait, as well as Algeria and Congo. But Libya, which is exempt from production restraint, saw a recovery in its output in May to around 1.1 million b/d.

“Year-on-year, OPEC crude oil production for 2019 is expected to decline by 1.8 million b/d, with more than half of that reflecting the impact of U.S. oil sanctions on Iran and Venezuela. Venezuela’s production was already in decline, but US oil sanctions are biting, with the country seeing a further 500,000 b/d fall in output since the beginning of the year.”

While Nigeria’s 2019 budget is benchmarked on the sale of 2.3 million barrels of oil at a price of $60 per barrel, Fawibe noted that the development at the international market is unlikely to affect the budget. He however warned government to be mindful of planning around the possible increase in the price of the commodity.

Like other stakeholders, Fawibe was hopeful that the current production cut would be maintained to balance the market. With the appointment of Mele Kyari as the new Group Managing Director of the Nigerian National Petroleum Corporation, Jaiyeola was optimistic that Kyari, who double as Nigeria’s representative to OPEC would use his experience to discuss agendas that would favour Nigeria’s ailing economy.

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