Iran and Europe tensions to keep oil prices high in 2012, Middle East output sustained

February 16, 2012 11:48 am

An oil market forecast by Global Investment House cites ongoing geo-political tensions as the primary factor pushing oil prices higher, along with global GDP growth and increasing demand, most notably from China’s increasing thirst for energy.

“The expected growth in world oil demand by 1.2% to 88.9m bpd will be fuelled by an expected real world GDP growth of 3.3% in 2012, although the increase in geo-political risk is also likely to keep an upward pressure on prices. However, any escalation of European sovereign debt crisis presents a major downside risk to oil prices,” say the Kuwait-based analysts.

Following a 20% year-on-year price jump, a barrel of the benchmark West Texas Intermediate (WTI) crude oil cost $94.9 by the end of 2011, although the threat of supply disruptions during the Libyan civil war caused prices to spike as high as $110 per barrel in the second quarter. Prices, however, are expected to stay around $95-$100 throughout this year.

Production in Libya plummeted to 47,000 bpd in Q3 last year, compared to 2010’s average output of 9.1m bpd. However, with the Transitional National government in place, there is optimism that the war-torn nation is on the road to recovery as output tipped 0.77m bpd by the close of December.

Is the Strait of Hormuz still an issue?

Confusion still reigns over threats of a blockade within the Strait of Hormuz, where five out of six GCC members – all but Oman – rely on the shipping lane to export the majority of their oil and gas. Over a fifth of the world’s supplies pass through on a daily basis. Iran’s threat still lingers as the Western sanctions take their toll, though many cast aspersions as to whether such drastic action will be enforced.

Robin Mills, Head of Consulting at Manaar Energy, told AME Info: “Any long-lasting blockade is in my view very unlikely as the US navy would re-open the Strait. In the short-term there might be some disruption, which could largely be covered by strategic stocks elsewhere. Obviously there is no feasible way of replacing the oil exports through Hormuz if they were disrupted for a long time – given 18-24 months, alternative pipelines could be expanded or constructed.”

The threat of disruption alone impacts the market: “The perception of risk is adding perhaps $10 to oil prices. There are other ways in which a conflict with Iran could spill over, for example elsewhere in the Gulf, or in Iraq. Bear in mind there have been repeated scares over the security of Hormuz going back many years,” added Mills.

The Oxford Institute for Energy Studies released a report this month regarding the ‘myth’ of Iran’s ability to wield power via its oil supplies, reinforcing the reminder that this is no new threat.

“The nature of global oil markets is such that oil flows freely, and at whatever quantity and price the market participants are willing to transact at,” said Laura El-Katiri and Bassam Fattouh in the Institute’s recent paper.

“In order for the [Iran] oil weapon to have an impact, it should result in the cutback of total global oil supplies. This measure, if effective in increasing the oil price, is indiscriminate, and would hit all consumer countries, friend and foe alike.”

Saudi Arabia seen increasing oil output

Iran oil minister Rostam Qasemi has called for Opec countries to adopt ‘reasonable policies’ after his Saudi counterpart, Ali al-Naimi stated adamantly during a speech in London that the kingdom would maintain the region’s output in the event of a supply issue elsewhere. It is unclear whether a bite would follow the bark, and if it did, it would inevitably be clumsy.

As of today it is unclear whether Iran will block oil supplies to six European countries, as Tehran has denied such reports. Oil accounts for 85% of Iran’s exports and 65% of government revenues, meaning a production cutback cannot be sustained, though threats have been made to pre-emptively cutting European exports, before the proposed July 1 embargo comes into play.

Opec’s total spare capacity stands at around 5.76m bpd, or 16.2% of current output. Saudi has the biggest ace up its sleeve with 2.7m bpd spare within its 12m bpd total capacity, despite already boosting production by about one million barrels last year. All the while Iran is taking heat over its nuclear program, this leeway holds extra significance.

Reuters last week reported comments from CIA Director David Petraeus that Saudi appears to be ‘ramping up’ production. US sanctions on Iran are now ‘biting much, much more’ in recent weeks, according to the former four-star general. The restrictions were made based on the suspicion that the Islamic Republic is developing nuclear weapons, though Ahmadinejad’s regime remains adamant that their nuclear program is for peaceful purposes.

Despite the forecasted increase in oil demand and the various pressures in play for Middle Eastern oil economies, consumption in Europe has actually reduced, for now. The northern-hemisphere’s winter typically drives energy demands, but European Q4 consumption began contracting, due mostly to the eurozone debt crisis. Even though demand surged in the previous two quarters, European oil consumption contracted at a rate of 272 thousand bpd, or 1.9% last year, according to Merrill Lynch. Most notably, Greek requirements plummeted 8.9%, with Italy and Spain dipping 4.9% and 7.4% by November. France, Italy and Spain also experienced declines.