Head­lines from Vi­enna will help de­ter­mine oil price trends

The Myanmar Times - - International / Business - MRIGANKA JAIPURIYAR

CON­CERNS around oil sup­ply dis­rup­tions may have eased af­ter Saudi Ara­bia and Rus­sia raised the possibility of re­leas­ing more oil into the mar­ket. But it is head­lines from the up­com­ing June 22 meet­ing be­tween OPEC and non-OPEC sup­pli­ers that will truly de­ter­mine the near- to medium-term price trend.

In­ter­na­tional oil prices, which hit 3 1/2-year highs in the af­ter­math of the US an­nounc­ing sanc­tions against Iran, eased back af­ter Saudi en­ergy min­is­ter Khalid al-Falih and his Rus­sian coun­ter­part Alexan­der No­vak said at the St. Petersburg In­ter­na­tional Eco­nomic Fo­rum in late May that they could start re­duc­ing out­put cuts in the sec­ond half of 2018.

OPEC and 10 non-OPEC pro­duc­ers, led by Rus­sia, were ex­pected to main­tain the 1.8 mil­lion bar­rels per day sup­ply cut through to the end of 2018.

The front-month ICE Brent crude fu­tures contract, which had breached the $80 per bar­rel mark on May 22, has since re­treated to the $75 per bar­rel level.

But the 24-coun­try OPEC and nonOPEC al­liance has a tough task ahead.

Ques­tions that will need to be thrashed out in Vi­enna later this month will cen­ter on how much oil should be re­leased back into the mar­ket and at what pace.

Min­is­ters will be cau­tious of the need to strike the right bal­ance. Too sig­nif­i­cant a drop in price could thwart up­stream in­vest­ment, which has seen some signs of re­vival since the start of this year, and too high a price could im­pact the economies of the world’s largest oil con­sumers and bring de­mand de­struc­tion.

The vol­ume and pace of out­put re­lease is tough enough to es­ti­mate given the un­cer­tainty around Ira­nian and Venezue­lan sup­ply dis­rup­tions, but tougher still will be ne­go­ti­a­tions with Iran.

Iran has al­ready started play­ing hard­ball, hav­ing is­sued a warn­ing to its OPEC coun­ter­parts not to take the mar­ket share it risks los­ing un­der US sanc­tions.

Ira­nian oil min­is­ter Bi­jan Zan­ganeh in a let­ter to OPEC Pres­i­dent and UAE oil min­is­ter Suhail al-Mazrouei said he wanted a sep­a­rate agenda at the Vi­enna meet­ing to specif­i­cally dis­cuss sup­port for his sanc­tions-hit coun­try.

Many of the big­gest Mid­dle Eastern OPEC pro­duc­ers – in­clud­ing Saudi Ara­bia and Iraq – are direct com­peti­tors to Iran and so are likely to be the ben­e­fi­cia­ries of any re­duc­tion in its out­put. Iran cur­rently has 12% of OPEC’s mar­ket share based on S&P Global Platts sur­vey data.

Iran is al­ready fac­ing the brunt of the sanc­tions. French ma­jor To­tal last month halted plans to de­velop Iran’s gi­ant South Pars gas field as it sought to clar­ify whether the in­vest­ment could avoid fall­ing foul of US sanc­tions.

Sep­a­rately, the coun­try’s plans to at­tract in­ter­na­tional in­vest­ment to up­grade its down­stream sec­tor was dealt a blow af­ter South Korean con­trac­tor Dae­lim In­dus­trial pulled out of a Eur1.83 bil­lion deal to build new fa­cil­i­ties at the Es­fa­han re­fin­ery.

Against this back­drop, Iran will go all out to pro­tect its crude mar­ket share and has al­ready stepped up diplo­matic ef­forts to re­tain key cus­tomers.

Iran’s Euro­pean cus­tomers, who lift around 700,000 b/d of Ira­nian crude, have slowed their buy­ing mainly due to con­cerns about ship­ping and in­sur­ance.

The Euro­pean Union has promised Tehran that it will ex­plore all possibilities to en­sure un­in­ter­rupted im­ports. These ef­forts may well take on new vigor af­ter the US slapped tar­iffs on steel and alu­minum im­ports from the EU.

But Asia is where a bulk of Ira­nian crude flows to, and sig­nals from Asian cus­tomers have so far been mixed, mak­ing it hard to as­sess the ex­tent of fu­ture sup­ply dis­rup­tion.

China and In­dia, which to­gether take a lit­tle un­der 1 mil­lion b/d of Ira­nian oil, have said that they will main­tain im­ports.

South Korea has said that it is try­ing to pare back crude ship­ments from Iran. Over Jan­uary-April, its im­ports of Ira­nian crude fell 34.6% on the year to 321,000 b/d. How­ever, Iran still re­mains South Korea’s fourth-largest crude sup­plier.

South Korea is also not in a po­si­tion to ig­nore US sanc­tions be­cause the US is part of its key mil­i­tary al­liance try­ing to re­solve North Korean nu­clear threat.

Ja­pan, mean­while, is wait­ing for more clar­ity from Washington on the sanc­tions be­fore de­cid­ing on its next steps. Ja­pan im­ported an av­er­age of 165,481 b/d in fis­cal 2017-2018 run­ning from April to March.

The OPEC and non-OPEC al­liance will also have to heed sup­ply dis­rup­tion from Venezuela and tight­en­ing sup­ply-de­mand fun­da­men­tals.

OECD oil stocks fell be­low the five-year av­er­age by 1 mil­lion bar­rels in March for the first time since 2014, ac­cord­ing to the In­ter­na­tional En­ergy Agency.

Mean­while, the Venezue­lan sup­ply crisis seems to have wors­ened with state-owned PDVSA telling its cus­tomers that it will only be able to sup­ply 46% of the 1.495 mil­lion b/d it had com­mit­ted to sup­ply in June.

Chi­nese buy­ers of Venezue­lan crude have al­ready started ex­plor­ing al­ter­na­tive sup­ply op­tions.

Mriganka Jaipuriyar is As­so­ciate Editorial Di­rec­tor, Asia & Mid­dle East En­ergy News & Anal­y­sis at S&P Global Platts

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