Getting enough oil out of the Middle East’s vast reserves can be frustrating. But another commodity, optimism, never seems to run out despite long, bitter experience.
Growing hopes regarding a couple of the region’s most pressing problems helped keep a lid on oil prices this week. A draft UN resolution on Syria’s chemical weapons appeared to confirm that US military strikes are off the table. Meanwhile, high-level meetings between US and Iranian officials over Tehran’s nuclear ambitions have raised the possibility of sanctions being eased.
Brent crude oil has clocked its third weekly decline in a row. Yet the reasons behind oil’s recent rise and fall extend way past Damascus and Tehran.
Syria per se is a mere drop in the global oil market. Its real significance lies in it being an ally of Iran.
More intriguing is the prospect of a thaw in US-Iranian relations. Iran could certainly do with looser sanctions. Since 2011, its oil exports have dropped by about 1mn bpd, worth almost $40bn in annual revenue at current prices, and its economy is mired in stagflation.
Getting even half those lost Iranian barrels back onto global markets would push down oil prices in a world in which spare capacity is less than 3mn barrels a day. But hopes around talks with Iran have a habit of starting strongly and then dissipating as the timetable drags on. Moreover, years of sanctions have inflicted such damage on Iran’s oil sector that even if the markets were opened, getting the fields back to full production would take time.
So while Iran’s charm offensive takes some of the geopolitical fever out of oil prices, the real action is in Libya. Amid labour strikes and civil unrest, Libya’s production collapsed from about 1.5mn bpd in the spring to about a 10th of that earlier this month. That likely boosted prices far more than any worries about Syria.
Libyan production has since recovered to about 600,000 bpd-700,000 bpd, according to Barclays and Citigroup. Again, that has likely played more of a role in moderating prices than geopolitical hopes.
The constant shifting around of supply disruptions makes for treacherous oil-price forecasting. Investors looking ahead should bear the following in mind. Disrupted global oil supply jumped from averaging about 2mn bpd in 2012 to almost 3.5mn by August. Meanwhile, the global economy is in its fourth year of recovery. Despite such support, Brent looks set to average just under $108.50 a barrel this year, based on prices to date and futures. That is high but actually below the averages for 2011 and 2012.
Can investors hope peace breaks out and loosens the oil market along with it? Don’t bank on it. But equally, don’t expect the threat of turmoil alone to spark big, sustainable rallies.
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