Oil prices set to soar on Iran, Venezuela crises

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Paris-based International Energy Agency, a global energy think warns that global oil market could tighten leading to significant jump in prices unless spare capacity is produced to offset production declines from crises-ridden Venezuela and sanctioned-threatened Iran, in its oil market report released yesterday.

“Since the previous edition of this report, the price of Brent crude oil hit close to $70 per barrel (bbl) and is now flirting with $80/bbl. Two reasons for the swing are that Venezuela’s production decline continues, and we are approaching 4 November when US sanctions against Iran’s oil exports are implemented. In Venezuela, production fell in August to 1.24 million barrels per day (mb/d) and, if the recent rate of decline continues, it could be only 1 mb/d at the end of the year,” the IEA said in a release announcing the report.

Citing evidence provided by their tanker tracking data, the agency believes that Iran’s exports have already fallen significantly “but we must wait to see if the 500 thousand barrel per day (kb/d) of reductions seen so far will grow. If Venezuelan and Iranian exports do continue to fall, markets could tighten and oil prices could rise without offsetting production increases from elsewhere.”

But there are countries who are also increasing capacity, last month Saudi Arabia and Iraq combined saw output increase by 160 kb/d. In Iraq’s case, exports have grown to such an extent that they are greater than Iran’s production, and there is still about 200 kb/d of shut-in capacity in the north of the country due to the ongoing dispute with the Kurdistan Regional Government.

“Based on our August estimates of production, OPEC countries are sitting on about 2.7 mb/d of spare production capacity, 60 percent of which is in Saudi Arabia. But the point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be “easy” to bring online, will be available to coincide with further falls in Venezuelan exports and a maximisation of Iranian sanctions,” said the report.

Meanwhile oil price rallied $79.64 a barrel and briefly broke above $80 on Wednesday after a drop in U.S. crude inventories by 5.3 million barrels last week and as the prospect of the loss of Iranian supply added to concerns about balancing demand and supply. It still hovers around $79 but analysts believe it could rise to $100 per barrel.
According to OPEC’s August monthly report, total OPEC crude oil production averaged 32.56 mb/d in August, an increase of 278 tb/d over the previous month.
“Crude oil output increased mostly in Libya, Iraq, Nigeria and Saudi Arabia, while production declined in Iran, Venezuela and Algeria,” OPEC said it is August oil market report.

Nigeria produced about 1.7 mb/d in August, 74k bpd more than it did in July but slow pace of reforms especially in setting up laws for the fiscal and governance regimes of its oil sector may impact on the country’s ability to play a leading role in filling the expected spare capacity.

“Investors are usually more concerned about fiscal terms and seeing that they can make money from their investment and don’t lose their money. They also are more concerned about stability, they want to know the rules, be sure it is stable and that they can enforce their rights,” Ayodele Oni, partner at Bloomfield lawfirm and an energy lawyer said.
The absence of these conditions has threatened new investments that will increase Nigeria’s production.

The IEA says the United States, Saudi Arabia and Libya seem better position to meet expected spare capacity that result from the inability of Venezuela and Iran to meet its output.

“On the upside, the United States continues to show stellar performance with total liquids output expected to grow by 1.7 mb/d this year and another 1.2 mb/d in 2019. However, companies are not adjusting their production plans, despite higher prices, due to infrastructure bottlenecks and this is unlikely to change in the near future. Even so, growth this year has returned to the extraordinary pace seen in 2014 during the first shale boom.

“Finally, Libyan production surged back in August to 950 kb/d, not far below the 1 mb/d level that was achieved for almost a year prior to the recent disturbances. However, as we have seen in the past few days with attacks on NOC headquarters, the situation is fragile,” the report said.