Courtesy of the growing depth in global output, oil markets today are depicting a rare resilience - despite significant outages. The growing specter of disturbances in major oil producing areas - from Libya to Sudan and Nigeria to Venezuela and now Iraq - could easily have sent markets into spin. Not this time -as yet!
This is in sharp contrast to February 22, 2011, when global energy ministers were meeting at the fabulously impressive King Abdulaziz International Conference Center in Riyadh, formally to sign the new IEF charter. Uprising against Gaddafi had begun and the consequent loss of roughly 1.6 million bpd light Libyan crude was weighing heavily on the minds of most men and indeed women present there on the day.
Everyone from the then IEA Executive Director Nobuo Tanka to US Deputy Secretary of Energy Daniel B. Poneman and Charles Hendry, the then British Minister of State for Energy and Climate Change, were disturbed, deeply concerned and nervous, on oil market prospects and the market volatility due to the outage.
At the end of the day Minister Naimi had to come forward, assure and reassure the world that the Kingdom was ready and indeed capable to pump all the crude required by the markets. But still, the quality of the crude to be made available and could that replace the light Libyan crude, kept haunting the corridors of the Conference Center that afternoon.
Energy world has undergone a massive change since then. It is faced today with a crisis of an still bigger magnitude, but the reaction is somewhat muted. The US Energy Information Administration (EIA) is of the view that unplanned disruptions have removed around 2.5 million barrels per day from the crude markets since the start of 2011. Libya is not back to normal - yet. Syria has been in turmoil - for two years now. Nigeria and Venezuela are faced with their own problems. Sudan is no exception.
And now Iraq, the emerging energy powerhouse the next door, is back in news - for rather adverse reasons. With militants taking over Mosul and Tikrit, and apparently advancing towards Baghdad, the country seems in the midst of a real chaos. Kurds have also reportedly taken control of the oil-rich Kirkuk.
This is significant. In the words of Daniel Yergin, ‘the recovery of Iraq was kind of key to the future of the world oil market.’ By April 2014, Iraq was producing an estimated 3.3 million barrels per day - equal to about 4 percent of global supply. And the country was expected to keep ramping up production. Although Baghdad was targeting an output of around 12 million barrels a day soon, yet even the Paris-based IEA was of the view that Iraq definitely has the capacity and the potential to take its output to around 6 million bpd.
Markets are not panicking. Oil prices did gain some two per cent after militants took over Iraq’s Mosul and Tikrit. World’s major oil blends gained between one and two pe cent. Brent crude for July delivery jumped 2.8 percent to $113 per bbl last Thursday, whereas, WTI gained $1.50 to $105.90 in US a barrel, the highest level since September.
Indeed, the ongoing action right now is in the north, which has less implications for the energy world. So far the only reported disruption is in the flow of oil through the 600,000 barrel Kirkuk-Ceyhan pipeline, running from Kirkuk to Turkey. The Kirkuk fields produce about 400,000 to 500,000 barrels a day, while the major fields in the Basra area produce about 2.6 to 2.7 million barrels a day, according to IHS.
But what if chaos spreads to the oil rich south of the country remains a major uncertainty? “If it spreads to the south or threatens the south, I think the anxiety is going to be reflected in the oil market. Absolutely,” says Yergin.
Markets have been able to absorb the lost supply because of the slackening demand growth and the growing alternative supplies from North American shale and Saudi Arabia.
Boom in US shale oil has caused America’s oil output to rise by four million bpd over the last four years. Since 2011 too, the US crude and condensates output has gone up by around 2 million bpd. Saudi Arabia too has increased output by a similar amount over the same period, according to the EIA.
In the meantime, global demand for gasoline and diesel has been stagnant or even falling, as vehicles become more efficient and consumers use their cars much less than in the past. The world is changing!
Consequently, global oil markets have been unusually steady since 2010. Dramatic changes in oil production around the globe have offset each other instead of wreaking havoc. The current rise in market prices is indeed not dramatic. “A $2 move is nothing in historical terms,” says BNP Paribas oil analyst Gareth Lewes-Davis.
Indeed if the turmoil hits the south of the country - then it would be a different ball game. “That could push oil prices to a much higher level - maybe 10,15 dollars higher from here,” says Oppenheimer senior energy analyst Fadel Gheit.
Sentiments control energy markets, most agree. And they don’t take long to change too. Just a few months ago, energy analysts were predicting OPEC powerhouses would need to cut output to make room for others. Now it’s a different scenario altogether. The call on Saudi oil is again growing. Saudi Arabia may need to pump a record 11 million barrels a day by December to cover the other member nations, says Energy Aspects Ltd., a consulting firm.
“Now it’s not whether the Saudis will make room, but whether they’ll keep it going and maintain enough spare capacity,” said Jamie Webster, of IHS Inc., an industry researcher.
Mid-May, the IEA too recommended a “significant rise in OPEC production” to meet demand of 30.7 million barrels a day in the second half of the year. Oil inventories in advanced nations were at 2.62 billion barrels in April, the lowest for that month since 2008, the year Brent reached a record $147.50 a barrel, IEA data show.
In the current scenario, what would be the ultimate call on Saudi crude? Estimates vary. IHS projects about 10.3 million and while Societe Generale says between 10.2 million barrels and 10.5 million bpd in the third quarter. Energy Aspects says 11 million bpd could be needed from Saudi Arabia.
Indeed it doesn’t take long for the oil markets to undergo transformation. And that makes the task of analysts entrusted with the task to peep into future – professionally a hazardous venture. The number of variables are indeed too many. And geopolitics continues to lead the bundle - despite all the efforts, all around! By Syed Rasih Husain© Copyright - Saudi Gazette