Supply levels, geopolitical risks to shape oil market in 2018

Supply levels, geopolitical risks to shape oil market in 2018
Commitment to the OPEC output agreement amounted to 86% year-to-date

By: Moslem Ali

Cairo - Mubasher: The change in the US policy towards Iran could impact oil markets, after American President Donald Trump refused to renew the Iran nuclear deal.

Trump has threatened not to certify the deal and even terminate it, if the Congress and US allies do not reach a solution under the plan presented by his administration.

Iran is the third-largest crude producer in the Organization of the Petroleum Exporting Countries (OPEC), with a production of around 2.3 million barrels per day, and although tougher policies and sanctions by the Trump administration will not immediately affect its output, some experts believe it may have consequences on the long run.

Sanctions would raise the geopolitical risks of doing business in Iran, and reduce foreign investments by corporations such as the French company Total, Royal Dutch Shell, Italy’s Eni, and Russia’s Rosneft, in a country that has an estimated $100 billion need for oil and natural gas investment, as per a recent report by Bloomberg.

A report by CNBC showed that by mid-2018, if the Iran deal start to deteriorate, we could have meaningful impact on oil supplies right when the market is tightening.

Gulf countries support the change in US policy towards Iran

Saudi Arabia, the UAE, and Bahrain has welcomed Trump’s new strategy against Iran.

An official statement issued on Friday stated that Riyadh had previously supported the nuclear agreement, believing that it is necessary to limit the proliferation of weapons of mass destruction in the region and the world, hoping the agreement would prevent Iran from obtaining such arms in any way.

However, according to the Saudi statement, Iran has exploited the economic benefits of lifting the sanctions and used them to continue to destabilize the region, especially through its ballistic missile development program and support of terrorism in the region, including the Houthi militias in Yemen and Hezbollah, Saudi Press Agency (SPA) reported.

Meanwhile, Kuwait called on Iran to work in regaining the trust of the region by adopting policies based on the United Nations (UN) principles and international laws, namely respecting the sovereignty of other countries, and not interfering in their internal affairs, Kuwait News Agency cited a source in the Kuwaiti Ministry of Foreign Affairs on Sunday.

Will oil market maintain its rebalance next year?

A recent report by the International Energy Agency (IEA) said that oil prices can face a decline due to an increase in production resulting in an over supply glut, as global stockpiles increases, with a surge in non-OPEC production, and a weak growth in demand could.

The IEA said in a report published last Thursday that it expects three quarters out of four in 2018 will be roughly balanced, assuming unchanged production levels by members of the Organization of the Petroleum Exporting Countries (OPEC), as well as normal weather conditions.

The International Energy Agency estimates for the first quarter of 2018 suggest a stock build of up to 800,000 barrels per day (bpd). As for the whole year, oil demand and non-OPEC production will grow by roughly the same volume and it is this current outlook that might act as the ceiling for aspirations of higher oil prices, the report indicated.

The report also noted that compliance with the agreed upon output cut reached 86% in 2017, with recent increases in the production of Libya and Iraq somehow offset by lower supply from Venezuela.

It is worth noting that Russian finance minister Anton Siluanov told CNBC in a recent TV interview that his ministry’s budget has taken into account price fluctuations, thus accounted for oil at a price of $40 per barrel.

Will electric cars drive the fall of oil prices?

The CEO of Longview Economics told CNBC in another interview that he believes oil prices will fall to $10 per barrel within the next six to eight years.

Chris Watling acknowledged that a key catalyst for the oil market would most likely be Saudi Aramco's initial public offering (IPO) in the second half of 2018, but he estimates that over the long term, with the development of electric vehicles, oil prices will fall, as around 70% of oil is used for transportation.

Brent can reach $60 by year-end

On the other hand, other analysts disagree, as oil and natural gas expert Kent Moors said in a recent article published by that he believes crude prices will rise despite the number of factors challenging its upwards trend, such as a possible decline in global demand, the rise in crude production, and what he believes is the ineffectiveness of the OPEC-Russia agreement to cap oil output.

The expert believes that by the end of 2017, West Texas Intermediate (WTI) will close between $55 to $57 per barrel (pb), while Brent will reach the level of $58 to $60 pb.

Finally, a number of factors seem to be controlling the prices of crude oil over the next period, and according to the IEA report, the next few weeks ahead of the producers' summit in Vienna on 30 November will be crucial in shaping their decision on output, noting that a lot has been achieved towards stabilizing the market, but to build on this success in 2018 will require continued discipline.