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Regional conflicts threaten oil price stability

Regional conflicts threaten oil price stability

Geopolitical concerns nudge oil prices up


Geopolitics is back in the driving seat. The US killing of a top Iranian commander on January 3 delivered a small boost for oil prices on fears that any violent retaliation from Tehran would disrupt energy supplies.

However, prices later surrendered some gains made as investors reconsidered the likelihood of Middle East supply disruptions.

Brent crude fell as much as 1.5 per cent to $67.86 a barrel and was at $68.39, down 52 cents on January 7. US West Texas Intermediate (WTI) crude futures were at $62.85, down 42 cents, after earlier dropping 1.5 per cent to an intra-day low of $62.30.

The gains followed fears of escalating conflict and potential Middle East supply disruptions after the January 3 drone strike in Baghdad that killed Iran’s Qassem Soleimani. But, some analysts have tempered expectations for a widespread conflict.

“The market’s clearly worried about the potential for supply disruption but there’s no obvious path forward from here,” said Lachlan Shaw, head of commodity research at National Australia Bank.

“It’s all a matter of scenarios that may impact oil production or not, so the market seems to have recalibrated in the last 24 to 36 hours on some of those likelihoods.”

He added that Iran will need foreign currency earnings from continued oil exports and it will be counter to their interest if they try to block the Straits of Hormuz. Roughly 20 per cent of the world’s oil passes the Middle East waterway, which borders Iran.

Consultancy Eurasia Group said Iran is likely to focus more narrowly on US military targets instead of energy targets.

“That’s not to say it won’t continue low-level harassment of commercial shipping or regional energy infrastructure but these activities will not be severe,” it added.

Prices fell despite higher compliance among the Organisation of the Petroleum Exporting Countries (Opec) on meeting production quota curbs aimed at reducing supply.

Opec members pumped 29.50 million barrels per day (bpd) last month, down 50,000 bpd from November’s revised figure, according to a recent Reuters survey.

US crude oil stockpiles likely dropped last week for a fourth week in a row as exports ramped up although refined products stocks were expected to rise, a Reuters poll showed on Monday.

Brent crude futures have actually only risen to their highest since mid-September, when an attack on Saudi Arabian crude facilities sparked the biggest price jump in more than 30 years. Whether oil markets calm down and stocks resume their climb hinges on what happens next.

Any conflict and surging oil prices risk snuffing out the nascent global economic recovery.

The ructions in the Middle East are a reminder of how hard it will be to kill off a near four-decade-long bull market.

Iran has promised vengeance.

Here is what analysts expect in terms of market response:

According to Ole Hansen, head of commodity strategy, Saxo Bank: “The US strike at the heart of the Iranian leadership signals a significant escalation. However, the price spike seen today has as opposed to the Aramco attack not been driven by a supply disruption.”

He added: “A price rise due to supply being disrupted as opposed to a demand driven spike carries the risk of sending prices sharply lower once the situation stabilizes.”

UBS said: “While neither the US nor Iran wish for an escalation in tensions, no one knows if, when, and how Iran will respond. Considering these risks, markets have added a risk premium on fears tensions could escalate.”

It added: “We assign a higher probability of renewed attacks on oil tankers, ships or/and energy infrastructure in the region than we do on the closure of the Strait of Hormuz, the Islamic Republic also relies on the strait for its crude exports.”

Jim Ritterbusch, president of Ritterbusch and Associates said: “The Middle East tensions are escalating at a time when oil supplies were already tightening in response to Opec production cuts and rising expectations for oil demand improvement off of an expected Phase 1 trade deal.”

He added: “Iranian developments are apt to spur a strong bout of inventory accumulation throughout crude or (oil) product distribution chains.”

He further said: “Increasing excess productive capacity in Saudi Arabia could act as a buffer if global oil supplies are disrupted appreciably.”

According to Paul Sheldon, chief geopolitical risk analyst, S&P Global Platts: “The chances of a broader conflict remain below 50%, although risks are entering new territory.”

He said: “Iranian retaliation could take the form of a quick response by proxies against US allies and assets, but a larger response is likely to be more carefully calculated and indirect in an effort to avoid outright conflict.”

Andy Lipow, president of consultants Lipow Oil Associates said: “The oil market is trying to assess the probability that this leads to a supply disruption. Iran, which has already seen their exports cut to minimal volumes, they have little to lose in the way of crude oil exports.”

In his view, Carlo Alberto De Casa, chief analyst, ActivTrades, said: “Oil’s reaction to the US attack on Iran is not a big surprise.”

He said: “The outlook for oil is very bullish with this latest geopolitical tension putting the supply side at risk.”

He said: “Killing of a top Iranian commander is likely just the beginning of market moving responses.”

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