FRIDAY, March 29, 2024
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Brace for market volatility as risks to oil supply loom large

Brace for market volatility as risks to oil supply loom large

OIL MARKETS need to brace for high levels of volatility in the coming months amid looming supply risks and uncertainty around available spare production capacity.

Opec and its producer allies set aside political differences and agreed on June 22 to an oil output increase of around 1 million b/d, but question marks remain around how much real volume will hit the market given that several countries are pumping at full capacity and some cannot raise production even if they want to.
 The supply side risks, meanwhile, have intensified. Political turmoil in Libya has severely disrupted production there, the US has announced that it intends to fully eliminate Iranian oil exports from the market starting November, and Venezuelan production is in freefall - the International Energy Agency expects its output to drop from the current level of 1.36 million b/d to 800,000 b/d by the end of 2019.
The front-month ICE Brent futures contract, which settled at $75.32/b after the Opec announcement – off the $80/b level it had touched a month earlier - has since risen and is again flirting with that level.
After a long and contentious meeting in Vienna, Opec and its non-Opec allies led by Russia announced that they would place an additional 1 million b/d supply in the market in the second half of 2018. The new individual oil production caps are due to be set by a six-country monitoring committee chaired by Saudi Arabia and Russia, which is due to meet in September.
S&P Global Platts Analytics expects the deal to result in a net realized increase in Opec production of 700,000 b/d, largely from Saudi Arabia, which according to Platts Analytics holds most of Opec’s two million b/d spare capacity.
 By Opec’s own estimate, global demand is expected to average two million b/d higher in the second half of 2018 than in the first six months of the year. Opec’s figures suggest the market needs more than 33 million b/d of its crude to balance the market in the second half, compared with current levels of 31.7 million b/d.
So a 700,000 b/d real increase would leave the market short, even without the additional supply disruption risks.
 Opec member Libya’s state-owned National Oil Corp warned on July 1 that the country could lose up to 850,000 b/d of its crude oil production – nearly 90 per cent of total output - if the blockade of its eastern oil export terminals is not lifted.
 The self-styled Libyan National Army has been in control of the main eastern oil ports since June 22 and handed over operations to NOC’s rival oil company, known as NOC East. It has prevented any ships from loading crude.
But the biggest potential supply shock, and one that will have serious ramifications for Asian oil importers, would be from US’ hardline approach to Iranian oil supplies.
The US State Department on June 26 said it is taking a hard line on Iran sanctions enforcement and Iran’s oil buyers should not expect any waivers to US sanctions that snap back in November.
The Obama administration, in contrast, granted sanctions waivers to countries in 2012-15 as long as they demonstrated significant reductions in Iranian oil imports every six months.
The announcement has created uncertainty for top Asian oil importers China, India, Japan and South Korea - which combined take in around 60-65 per cent of Iranian exports.
While Asian governments are still seeking clarity on the latest US stance, they have asked their oil companies to prepare a roadmap for alternative supply sources.
At least one Japanese refiner has said it is considering suspending Iran imports from the August loading program amid sanction fears and in India refiners have been told that the Euro payment mechanism that they were using to make payments for Iranian oil will no longer be available to them.
China, which has always maintained oil imports from Iran, has been quiet about the latest US stance. Beijing may have decided to adopt a wait and watch approach as it battles an ongoing trade war with the Trump administration.
Though, according to a senior state oil company executive, China is reportedly pushing for a system where purchases from Iran are insulated from the dollar-denominated system and payments are made through banks that qualify, implying that it intends to maintain its imports from the Persian Gulf supplier.
It is highly likely that Saudi, Iraqi and UAE barrels will replace some of the lost Iranian barrels in the Asian market. And as Iran faces the prospect of losing market share, it has stepped up its rhetoric against arch rival Saudi Arabia and warned that any attempts by the Saudis or other Opec members to produce above their quota would be in breach of the recent agreement and would undermine the unity and independence of Opec.
 So, the world not only faces supply risks, but also the possibility of a broken Opec that is unable to control the oil markets.

Contributed by MRIGANKA JAIPURIYAR, Editorial Director, Asia Energy S&P Global Platts
 

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