Daniel Lacalle

Geopolitics and the Oil Price

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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.

Iran’s production has fallen because of three elements: 

a) Natural decline of mature fields which already happened before the embargo, with no relevant capex devoted to address it.
b) Too much money going into subsidies to nuclear, housing, power and youth unemployment instead of keeping reservoirs, and
c) The embargo (impact of 1.5mmbpd in my view), which was partially compensated by higher exports to China (550kbpd).

This is key:

OPEC has kept the oil market well supplied, compensating the Iran embargo impact by forcing abnormally high levels of Saudi, Kuwait and UAE production, significantly above their quotas.
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.

My view:

  • 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.

Una respuesta a Geopolitics and the Oil Price

  1. Hannah Taylor 27 junio, 2013 a 6:42 am

    You have a really great site! I love how useful a lot of your topics are. I was wondering if you would consider mentioning my website on your next post? I’ll be sure to mention yours on my blog in return. Thanks!

    Cheers,

    Hannah
    hannah.taylor4545 at gmail.com

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