Surging crude price risks major oil shock
Opec’s policies mixed with geopolitical flashpoints threaten a perfect storm
The world risks a full-blown oil shock within months as three geostrategic crises come to the boil and Saudi Arabia hints at $US100 crude, setting off a speculative scramble by commodity hedge funds.
Brent crude has surged this week to a 40-month high of almost $US75 a barrel even though the global economy is losing momentum. It reflects a constriction of supply and a rising “political premium”. Such a context makes it more threatening.
It is now likely Donald Trump will reinstate oil sanctions against Iran next month, adding extra curbs on distillates. Japan and South Korea will almost certainly join the Americans. Most European firms will fall into line since it is dangerous to defy the US Treasury. Most insurers and shippers will steer clear of Iranian cargoes.
“We are pretty confident that oil will be in triple digits by next year,” said Jean-Louis Le Mee from Westbeck Capital. By then the oil market will be feeling the delayed effects of a 40 per cent slump in investment from late 2014 to early 2017, storing up a structural shortfall of 8 million barrels a day . Le Mee said the Iranian sanctions alone will take up to 500,000 barrels a day off the global market by the fourth quarter, rising to 700,000 in 2019.
This is happening just as the proxywar between Saudi Arabia and Iran over Yemen reaches a lethal stage.
It is also happening as Venezuela’s oil industry goes into near-terminal collapse. Output has crashed by 550,000 barrels a day since early 2017.
The Opec-Russia cartel can at last declare “mission accomplished” though it has taken much longer than they ever imagined. Joint cuts of 1.8m barrels a day have reduced OECD oil inventories towards their five-year average and cleared most of the global glut, with the Saudis cutting even deeper than agreed in an attempt to lift prices above $80 before selling off shares in Aramco.
Saudi Arabia and Russia are now signalling that they aim to extend the cuts deep into 2019. This has been the green light for hedge funds and ETF commodity investors.
The oil surge has pushed US petrol prices to $US3 a gallon, prompting Trump to tweet that Opec is keeping prices “artificially very high”.
US shale output can no longer keep up with the global shortfall. Although US production has rocketed by 800,000 barrels a day this year to a modern-era high of 10.5m barrels a day in April, a lack of pipelines is leaving “stranded barrels” in the Permian basin of east Texas. The new infrastructure will not be in place until mid-2019.
America’s refineries are geared to mixing sulphurous imports from Venezuela. They cannot cope with the volume of quality “super-light” grades from shale. This mismatch will remain until new refineries are built.
Strictly speaking, Trump’s criticism of Opec is correct. Bjarne Schieldrop from SEB says prices would slide to the low $US50s without the cartel cuts.
Nikolaos Panigirtzoglou from JP Morgan says global consumers enjoyed a $US1.8 trillion annual windfall — worth 2.2 per cent of global GDP — when oil prices crashed. This acted as a “tax cut” stimulus. The process is now going into reverse. On cue, JP Morgan’s instant “Nowcast” tracker of world growth has dropped from 4 per cent to 3.2 per cent since the start of the year.
It is hard to separate cause and effect. China has been cooling as credit curbs bite. Monetary tightening by the US Federal Reserve is lifting global borrowing costs. The slowdown may prove to be just a soft patch but late-cycle pathologies abound and there are reasons for caution. In the end, Opec and Russia are walking a tightrope. They risk a serious misjudgment if they push prices too high.
A return to $US100 oil would accelerate investment in electric vehicles and bring forward the moment of cost parity with petrol and diesel engines, at which point the oil industry risks losing and going into run-off.
Whatever happened to those Saudi counsellors sagely warning last year that any sustained move above $60 was short-sighted folly?
— Telegraph Media Group