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Oil price pressures political risk factors

Monday, 20 February 2012 | 00:00
The global economic crisis has seen the price of oil torn in all directions, as poignantly highlighted by the exceptionally 2008-2009 cycle. The current constellation of market drivers promises another installment of volatility. On the one hand, in spite of some positive signs, the global economy remains fragile and the prospect of fiscal consolidation in many economies has pushed oil demand erosion concerns back to the forefront. On the other hand, much as happened during Libyan civil war, increasingly loud saber-rattling between the West and Iran is once again pushing up the risk premiums on oil as the Iranians threaten with the extreme measure of shutting off the Straits of Hormuz. And to complete the spectrum of conflicting forces, the global financial markets remain in crisis, potentially jeopardizing the investments that will be needed to ensure that the global supply of oil can keep up with the structural demand drivers. Under the circumstances, OPEC statements have with growing consistency come to support a price of $100 a barrel as the optimal price in terms of not overly weakening the global economy while ensuring longer-term supply security through adequate investments.
But the main tug of war is now clearly waged between the demand bears and the political risk factors associated with Iran which are already prompting a number of especially Asian countries to seek new sources of oil from the other side of the Gulf. Highlighting the global economic uncertainty, OPEC recently reduced its projection for the increase in global oil demand in 2012 by 120,000 bpd to 940,000 bpd. This takes the total drop from OPEC's original 2012 projection to about a third. However, and importantly, it still leaves global oil demand growing at a time when it has already rebounded beyond the pre-crisis levels.
The key date with respect to Iran is July 1, when the European Union is planning to halt imports from the country. Iran's total exports in 2011 were around 2.5 million bpd of which some 600,000 bpd was destined to the EU, above all economically vulnerable economies such as Greece and Spain. Iran is the second-largest OPEC producer and the country's overall output is some 3.6 mbpd, significantly higher than the just over 1.5 mbpd produced by Libya before its civil war. Nonetheless, Saudi Arabia has signaled its willingness and ability to make up for any shortfall created by reduced exports from Iran, much as it did during the Libyan crisis. It remains the only true swing producer today, although some spare capacity exists also in other Gulf producers.
In the face of this reality, the Iranians have upped the ante by threatening to close off the Straits of Hormuz which are the outlet for some 17-20 percent of global oil, roughly 17 mbpd. While the credibility of this threat has been questioned by many, since it would disrupt Iranian trade as well, it would create a major challenge. Saudi Arabia's ability to stabilize the oil market in the face of an embargo on Iran will be critically dependent on the straits remaining open as the currently operational pipelines available for rerouting the Hormuz exports from the GCC are estimated to allow for at most 5 mbpd of exports through alternative avenues. As a result, even a short disruption to the Hormuz would push oil prices to a new range, estimated by some to be as much as $200 a barrel. But whether the Iranian threat is credible or not, the current tensions in the oil market seem to leave the balance in favor of forces driving the oil price up rather than down.
Source: Arab News
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