No one can bank on the rise in oil prices

October 08, 2017

The price of Brent crude, a major benchmark for oil purchases world­wide, has gone up. At the start of October, it moved to $55-$60 per barrel, after having remained at $50-$55 for most of the previ­ous year. Crude oil prices have increased $1-$3 per barrel since August.

The oil price is significant for two reasons. It reflects the range that most oil producers would like to see and it happened just a year af­ter OPEC signed the Algiers’ agree­ment to rebalance the markets.

Two dozen other oil-producing countries joined OPEC’s efforts to reduce production by 1.8 million barrels per day. The collective effort was meant to stop the rapid fall of oil prices. In January 2016, oil was selling at less than $30 a barrel.

The challenge was to reduce the exceptionally high commercial stocks. By the middle of last Sep­tember, Organisation for Economic Co-operation and Development (OECD) commercial stocks to­talled 3,016 million barrels but the surplus over the five-year average had been 190 million barrels, the International Energy Agency (IEA) said.

Oil prices rose recently because of global demand, which increased 2.4% in the second quarter of this year. The IEA projected that de­mand growth will average 1.6 mil­lion barrels per day in 2017. OECD demand growth has been stronger than expected, particularly in Europe but hurricanes Harvey and Irma were expected to slow US de­mand growth in the third quarter this year.

Global demand growth has been driven by distillates, particularly diesel. Last year, it was driven up by gasoline and other petroleum products. In 2017, demand for diesel made up half of the growth, nearly half as much on last year. The rising demand for diesel has been under way throughout the year, mostly in the United States, China and India. This is expected to continue into 2018.

The hurricane season in the Unit­ed States, particularly Hurricane Harvey, caused local shortages and disruption to refineries in Houston of about 1.6 million barrels per day in September. Such disruption in the oil industry usually leads to higher prices.

Pressure also mounted follow­ing the Iraqi Kurdish referendum. Threats of economic boycott and sanctions continued after the semi-autonomous Kurdish region voted for independence on September 25.

The Iraqi parliament asked Prime Minister Haider al-Abadi to send troops to take charge of the oilfields in the disputed Kirkuk re­gion. The day after the referendum, Abadi said all land and air cross­ings in Iraqi Kurdistan must return to Iraqi federal jurisdiction. The ultimatum caused the exodus from Kurdistan of diplomats, foreign businessmen and oil executives and workers. Abadi ordered that all oil revenue must go to the Iraqi federal authorities.

Threats from Turkey raised concerns about the oil industry in Kurdistan. Turkish Prime Minis­ter Binali Yildirim told Abadi that Turkey would henceforth deal with the Iraqi government and no other on oil exports from Iraq and that it would only facilitate the export of Iraqi crude. Turkish President Recep Tayyip Erdogan threatened to shut down the Kirkuk-Ceyhan oil pipeline, the only outlet for Iraqi Kurdistan to send its crude to international markets.

This is not expected to happen immediately because Turkey has billions of dollars invested in Kurd­istan but Ankara’s threat may deter development of the Kurdish oil in­dustry. It’s likely that international oil companies will be reluctant to invest in a region that might have its only oil pipeline shut down.

If that happened, the conse­quences would be disastrous. It would close the main source of revenue for Iraqi Kurdistan. Tehran has stopped exporting petroleum products to Kurdistan and Iran and Iraq have conducted joint military exercises along Kurdistan’s border.

Finally, oil prices have risen on account of slowing US produc­tion. There was a decline in US rig count for six consecutive weeks. Productivity is falling in the giant oil shale basins, Eagle Ford and the Permian.

The markets are concerned that non-OPEC production will increase in 2018, which could threaten a plunge in price. The surge in non- OPEC production is expected from fields developed before the 2014 oil price collapse.

All in all, the rise in oil prices is fraught with uncertainty.