Geopolitics and the Oil Price
As I mentioned in CNBC recently, oil was on its way to re-rate. Since then, Brent has risen 6%, with WTI +7.5% despite US record production (8.9 mbpd) and perceived slow-down of demand growth.This week I heard a few comments concerning the possible oil glut that would be created if Iran sanctions were lifted while US oil production soars. Here is my take:
The elections in Iran are a mild positive step, but not a game changer, in my view.
On a geopolitical level, concerns that the nuclear program goes full steam remain. Added to this, Iran yesterday sent 4,000 troops to support Assad in Syria. This, on a geopolitical level, is more important for oil prices and the Brent premium, given Iran and Russia support for Assad vs US and UK support for rebels.
A few years ago I commented in detail about Iran here.
Iran’s daily production is estimated to have dropped to about 2.5 million barrels a day from 4 million barrels a day before the sanctions.
a) Natural decline of mature fields which already happened before the embargo, with no relevant capex devoted to address it.
This is key:
In the last OPEC meeting the group kept a 30mmbpd unified target. Therefore, as always, if Iran was to produce more due to an embargo lift, the three countries I mentioned would go back to produce less and OPEC total production (inc. Iraq) would remain at 30-30.5mmbpd.OPEC’s basket at $101.3/bbl is already a concern for Venezuela, Ecuador and the “high cost” countries, which call for supply cuts.
In the last OPEC report the figures were as follows:
World oil demand: 89.65 mmbpd despite all the slowdowns we mentioned, and is growing 1% vs 2012.
Total non-OPEC oil supply 53.96 mmbpd of which US is expected at 10.68mmbpd. Healthy growth with Russian concerns.
Total OPEC 30.56 mmbpd + liquids 5.87.
Even if Iran adds 680kbpd with everyone else staying put, supply-demand balance is very tight into the hurricane season and coming back of several refineries (c350kbpd + 300kbpd).
Additionally I personally believe the market is not “speculative” in its positioning, and as we all know, “speculators” don’t drive the price, demand does. CFTC data already shows a low net length in oil.
In a negative “crisis” scenario, oil demand could drop to 89mmbpd, but I fail to see this, because the GDP slowdown of a few OECD markets meets solid and positive growth elsewhere, with global GDP up 3.8% 2013 and global oil demand +1.3%.Let’s not forget exportable capacity is shrinking. OPEC countries’ GDP is growing 4% pa and their internal demand for oil c3%. This cuts some exportable capacity.
Shale oil in the US is a true revolution (see my post here and here) but we always have to remember that it is a driver for WTI discount to Brent, more than Brent price itself. I expect oil production in the US to be less than the figure of 10mmbpd, but still showing a very healthy growth to 9.2mmbpd, driven by shale oil and better growth in GDP in the US as the economy recovers.
- If Iran comes back, Saudi Arabia will reduce the abnormal production they reached precisely to offset the Iran embargo impact (1.5mmbpd).
- Even if Iran comes back, volumes are slow to pick up because of years of lack of investment.
- Shale oil is a game changer for US GDP and its economy. A true stimulus. Good for US demand and a welcome addition to world oil supply, same as Canadian oil sands, deepwater or Brazil discoveries, as well as Iraq returning to growth. But break-even of new production drives marginal barrel cost (and OPEC break-even is $90/bbl incidentally, although I never use this as a metric, because it is inflated by the huge subsidies to other areas of the economy).
- China is slowing down but still imports +3.8% more for 2013.
- Europe is in recession but oil demand is flat.
- Rest of the World +1.5%.
- Call on OPEC and product tightness remains.
In summary: Market scares about oil-glut seem exaggerated. Demand on a global scale, maths and understanding how OPEC works should help us understand price is well supported unless there is a 2008 financial crisis.
Oil has stayed firmly above $102/bbl into Iran elections and with US shale driving US production to 8.9mmbpd.
The only thing that would drive oil massively lower is a financial meltdown that puts GDP collapse risk and recession back into the global mindset.
I have been neutral on oil price absolute levels and became moderately bullish as I explained in CNBC (see video here and comment here), but -like all year so far- I believe we will continue to be surprised at the price resilience in a very well-supplied market. Solid demand and low cost for the economy (less than 5% of GDP “oil burden”) keeps these prices in my view.