May 17, 2018
Analyst Ehsan Khoman says that geopolitics are currently overshadowing fundamentals and playing a huge role in the near-term future of the energy market.
It is, according to Ehsan Khoman, head of research and strategist for MENA at global bank MUFG, “mayhem in May” for the global oil markets as geopolitics threatens to impact supply in three highly important regions.
The month sees three major events shaping the energy landscape in the near term:
- US President Donald Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), the agreement that lifted sanctions on Iran in return for shelving their nuclear ambitions
- The recently concluded elections in Iraq, the country with the world’s fifth largest proven petroleum reserves
- The forthcoming elections in Venezuela, the country with the largest proven oil reserves.
The political ramifications of each will, when fully realised, have a clear impact on supply and therefore prices.
“If you take geopolitics out of the equation,” Khoman says, “then we’re actually bearish on prices. We have a forecast of Brent at an average of, $64 and West Texas Intermediate (WTI) at $59, for 2018 as a whole, and think that there is actually a likelihood of oversupply as more shale oil comes onto the market, but the geopolitical environment has kept prices elevated at above $70 with further upside risks in the near term.”
Here, Khoman reviews the key areas impacting the oil price.
President Donald Trump’s decision to withdraw from the JCPOA, signed in 2015 by the EU, Russia and the US, was perhaps no surprise – despite the intervention of French president Emmanuel Macron, it was a long-standing campaign promise – although the scale of the sanctions imposed was more unexpected. There are, though, plenty of question marks about what happens now, including Iran’s response, the severity of sanctions to be outlined by Treasury Secretary Steven Mnuchin and how large multinationals will act on the news.
“Markets haven’t fully priced in yet how the ‘hard exit’ US stance will channel through into the willingness of Iran’s crude importing countries to comply with the US restrictions” Khoman says.
“While the unilateral US reimposition on Iranian crude will reduce its exports, the size and scope still hinges on Iran’s importing countries’ adherence to the sanctions, and most importantly the uncertainty surrounding shipping insurance, which was critical in disrupting Iranian crude exports between 2012-16.”
Even if Europe manages to persuade Iran to stay in the deal, however, the sanctions regime will almost certainly impact European energy companies that operate in both Iran and the US.
“The issue will be whether multinationals such as Total will keep operations in Iran going,” Khoman argues. “Total recently invested $90m in the Phase 11 to develop the offshore South Pars gasfield, for instance, and we are yet to hear guidance from the IOC in relation to its strategy in the country”.
There’s also the additional matter of the OPEC meeting in June and Iran’s stated desire to see oil return to a price between $60-$65, which they see as a more suitable level. This might signal a split with other countries in the production cut agreement.
The people of Venezuela go to the polls on Sunday, May 20, a snap election that has been beset by problems – not least the fact that several members of the main opposition party, the Democratic Unity Roundtable (MUD), have been prevented from running, which has subsequently led to their boycott of the process.
As such, it’s looking rather like a one-candidate race with incumbent Nicolas Maduro of the United Socialist Party of Venezuela set to set to earn a second term in office.
“The result is looking like a foregone conclusion for Maduro and already the US, the EU and several of Venezuela’s neighbours have already refused to recognise the legitimacy of the vote,” says Khoman.
“So, it’s clear that a new raft of new US sanctions is likely to be put in place against Venezuela – the scale and scope of which we’ll see in the coming weeks, but there’s potentially 500,000-600,000 bpd coming off the table by the year end.
“What we do know, though, is that the degradation of the oil production infrastructure in the country is already accounting for a loss of 810,000 bpd since January 2017, and there have been suggestions from Rafael Ramriez, the former head of PDVSA, the state oil company, that it is on the verge of financial collapse due to mismanagement and underinvestment.”
The precise outlines of the Iraqi elections remained indistinct, although it seemed clear that Muqtada Al Sadr’s party was the surprise victor. Seen as a nationalist, Sadr’s victory is being considered a repudiation of Iran’s attempts to influence the campaign.
According to Khoman, the main issue for the oil markets is the impact any new government will have on Baghdad’s relations with the Kurdish Regional Government (KRG).
“With the Kurdistan Democratic Party likely to transpire as the leading force in the Kurdish areas, the federal government may need to renegotiate their revenue sharing arrangements with the Kurds and critically an oil agreement that focuses on Kirkuk exports.”
What is really important is how the new ruling party deals with the Kurdish Regional Government (KRG)”, which controls 500,000-600,000 bpd out of the country’s total oil production of 4.4m bpd. They had a vote back in September 2017 about independence and 93 percent voted in favour, only for Turkey to threaten to a range of economic sanctions. The relationship between the Kurds and Baghdad will be one to watch.