Middle East tensions to cause oil price volatility
AMIDST an uneasy calm in the Middle East, currently the scene of unpredictable events, oil price is likely to remain volatile.
Oil has dropped back to levels last seen before the US drone attack on Iran’s top commander Qassem Soleimani on Jan 3, as tensions momentarily eased.
Brent crude, the global benchmark, fell 45 US cents to US$64.92 last Friday; West Texas Intermediate (WTI) dropped 52 US cents to US$59.04.
Brent crude in London had hit a threemonth high of US$72 per barrel immediately after Iran launched a counter attack on two US air bases in Iraq.
Still, oil prices have risen 23% from their lows in early August, according to Refinitiv Oil Research. Prices have gained 37% since the end of 2018, on Middle East tensions and supply cuts by major oil producers.
Long-term risks of conflict in the region persist, even as Iran said it would not seek escalation of war, and the United States also pulled back from the brink of war.
Markets were put on alert as new sanctions were imposed on Iran following its missile attacks on US air bases in Iraq, coupled with the aggressive approach by a Russian navy ship towards a US navy destroyer in the North Arabian Sea.
As a sign of caution, Japan is sending self-defence forces personnel and assets to the region to ensure the safety of its ships in the operational areas of the Gulf of Oman and part of the Arabian Sea.
Oil exports from the region accounts for a third of world supply; most of the crude exports from the Persian Gulf transit through the narrow waterway called the Strait of Hormuz.
The centre of global tensions, this is a strait between the Persian Gulf and Gulf of
Oman; it connects the Persian Gulf to the Indian Ocean, with Iran located in the north and United Arab Emirates and Oman in the south.
Being the only sea passage from the Persian Gulf to the open ocean, it is a strategic choke point which Iran has threatened to close.
Disruptions on tanker crossings can upset energy markets; about 20% of global oil supply is exported in tankers via the Strait of Hormuz through which 21 million barrels of oil were transported daily in 2018.
Saudi Arabia’s tanker operator, Bahri, suspended crossing the strait last Wednesday, Brazilian oil company Petrobras also kept some tankers away from the area.
Shipping companies diverted their goods to Oman, some delayed their loading of goods out of the Persian Gulf or changed course and delayed shipments.
Middle East tensions and any potential supply disruptions have typically resulted in some upward pressure on prices.
Half of Saudi Arabia’s oil production was briefly affected by a missile attack in September; oil prices rose last July after the Iranian military seized a British tanker.
Depending on whether the Us-iran situation escalates, we should brace for higher price volatility, according to Fortress Capital CEO Thomas Yong.
So far, there has been no all-out war but tensions will likely continue to stay high, as a result, oil prices are expected to stay elevated, said RHB Research Institute chief Asean economist Peck Boon Soon.
US crude supplies rose by 1.2 million barrels for the week ended Jan 3, following declines in the previous three weeks, said the Energy Information Administration (EIA).
Global oil supplies are still plentiful, thanks to the US shale-oil revolution while abundant oil production is also coming from Brazil, Canada, Norway and Guyana.
The Organisation of the Petroleum Exporting Countries (Opec), which has been cutting supplies for the past three years, also probably has huge spare capacity.
Although industry surveys showed that Opec output fell in December ahead of the new pact to further cut supplies, production still remains higher than forecast demand for early 2020.
Under an excess supply situation, oil supply disruption due to a potentially sustained clash in the Middle East may not drive oil prices higher, said Socio Economic Research Center executive director Lee Heng Guie.
Despite the number of disturbances, the EIA noted that prices still remain around US$60 per barrel with no major increase as the world oil market is well-supplied with more than a million barrels per day.
Prices may find some support in the short term as the US seems to have stayed put on production, and Opec sticks to its production cuts, said CNBC.
Mis-steps can occur; Iran’s military had accidentally downed a Ukrainian airplane which took off from Tehran Airport.
The tensions can spread to other countries as the plane was carrying some of their citizens.
“We can only hope for cooler heads to prevail,’’ said Inter-pacific head of research Pong Teng Siew.