Lurking Geopolitical Threats To The Oil Market
The current violence in Israel and the Gaza Strip is tragic and understandably holding the attention of the media and the world, but other, less noticed, developments could pose a significant threat to the price of oil. Perhaps it was Yogi Berra who said, “You’re always surprised by what you didn’t expect,” but it’s definitely a truism, nowhere else more than the oil markets.
At present, there are three different developments related to Iran that could have a significant impact on the oil market, although the outcome of each is speculative. The Iranian-U.S. negotiations, more politically than socially distanced, could see a resumption of the JCPOA which would mean a serious relaxation of the sanctions currently imposed on Iran by the U.S., which might add 1 mb/d to the market, albeit after a delay of some months.
The reported behind-the-scenes meetings between Iranian and Saudi officials could see a significant reduction in regional tensions, perhaps including a cease-fire or even peace agreement in Yemen. That could mean less danger for shipping in the region and perhaps a resumption of Yemen’s 400 tb/d production—eventually. Needless to say, this in itself would not be very important to the oil market, but less tension in the Gulf region would have a long-term impact on risks for oil operations and defense spending. Again, potentially a positive development but of no great near-term impact.
Of greater concern is the approaching Iranian elections. On May 27th, the Guardian Council will announce the list of approved candidates for the June 18th presidential contest, with most applicants expected to be disqualified. This will upset many in the public whose preferred candidates are stricken from the list. And it seems all but certain that a hard-liner (as they are called in the West) will become the next president. There is a possibility that the current Rouhani administration will try to cement an agreement with the U.S. before the election, but more likely a new administration will either pull out of the negotiations or erect barriers that prevent any prompt agreement.
The combination of failed negotiations and perceptions of an unfair, if not outright invalid, election could easily result in new domestic unrest in Iran. The pandemic, the 2014 oil price crash, and the stricter U.S. sanctions have left the Iranian public in difficult straits, raising the possibility that another uprising will occur aimed at forcing change on the government. This could include labor action by oil or dockworkers that would see Iranian oil exports drop by 0.5 to 1 mb/d (exact levels are unclear, given smuggling). This is hardly crucial compared to the pandemic’s effect on demand, but would certainly boost prices, if only briefly, and cause OPEC+ producers to re-evaluate production plans.
Finally, signs of political life in Venezuela could be either bullish or bearish. The Maduro regime, having destroyed the nation’s economy and devastated the public, has now reached out to some opposition politicians and set a November 21 date for regional elections, while opposition leader Juan Guaido appears open to reducing U.S. sanctions. This could mean an eventual return of skilled oil-field workers who could restore a moderate amount of production with some maintenance. Conceivably, as much as 0.5 mb/d could be added by year’s end and more next year, but betting on reasonable behavior from the Maduro regime is, at best, high-risk.
Ultimately, there are signs of gradual improvement in the geopolitical environment for the oil industry, but which would translate into supply increases of as much as 2 mb/d by the middle of the year (although a 1 mb/d increase is more likely), and political unrest in Iran and Venezuela could have the opposite effect. Oh, yeah, Libya (no further comment.) As oil economist Yoda would say, “Always in motion the future is.”