WisdomTree: Rarely does a month go by without a major geopolitical incident in the Middle East. The region accounts for 34% of oil production and 48% of world proved reserves (BP Statistical Review of World Energy June 2019). In short, it is an important oil region…..
By Nitesh Shah, Director, Research WisdomTree
On 12 May 2019, four commercial ships were damaged off Fujairah’s coast in the Gulf of Oman. Iran was widely blamed for these attacks.
On 13 June 2019, two oil tankers were attacked near the Strait of Hormuz while they transited the Gulf of Oman.
On 4 July, UK forces seized an Iranian tanker on suspicion of breaking EU sanctions on Syria.
On 19 July Iran retaliated and seized a UK ship. Iran faced a wrath of sanctions from the US as a result.
On 14 September, Saudi Arabian oil facilities were attacked, initially taking off 5.6 million barrels of production off the market. Once again Iran was blamed for the incident.
On 11 October an Iranian tanker was hit by missiles.
Upon releasing video footage, on 14 October, Iranian President said there will be consequences for the government that was behind the hit.
Add in the Turkey-led offensive in north-east Syria that started on 10 October and you have a serious cocktail of geopolitical issues in the region.
WisdomTree – But markets don’t seem to care. Why?
The market seems to look at each as isolated incidents. None of which have really taken a lot of oil off the market.
The largest incident – the drone attacks on Khurais and Abqaiq Saudi Arabia that took 5.6mb/d1 off the market – was surprising short-lived in its impact.
Saudi Arabia got production back to pre-attack levels within weeks.
Although infrastructure is damaged and full capacity is not fully restored, it is close. Saudi Arabia have confirmed that Khurais, which has 1.45mb/d of capacity is technically able to operate at full capacity.
In Abqaiq, three out of five stabilisation towers are back to working as normal and will take six more weeks to fully restore all of them.
At full capacity Saudi Arabia can produce more than 12mb/d, although it choses to only produce around 9.5mb/d.
However, we know these are not isolated events.
The proxy war between Saudi Arabia and Iran is at risk of turning into a full-blown war.
Saudi Arabia has become the world’s largest weapons importer.
In 2018 alone it spent nearly $70bn on arms, almost 9% of its GDP.
The US sold about 70% of these between 2014 and 2018, and the UK sold about 10%.
With Saudi armed-up and Iran continuing to rattle sabres, we believe the risks are high.
WisdomTree – Markets are focusing on potential weak oil demand amid global trade wars.
The International Energy Agency (IEA) is predicting 2019 and 2020 oil demand growth of 1.0mb/d and 1.2mb/d respectively.
A year ago it had expected 1.4mb/d for 2019 – 0.4mb/d higher than its revised forecast.
Many in the market fail to realise that in Q3 and Q4 2019 the IEA is forecasting a supply deficit, leaving the market for 2019 basically in balance.
The IEA’s surplus forecast for 2020, could be countered by Organization of the Petroleum Exporting Countries’ (OPEC’s) policy decision when it meets in December 2019.
We believe the small oil market growth demand revision is miniscule in comparison with the risks of oil supply disruption.
The risks to moving oil around the world are large. Take the Strait of Hormuz – the world’s most important oil choke point – carrying 30% of global seaborne-traded crude oil and other liquids.
It is also the avenue for all of Qatar’s liquefied natural gas (LNG) exports, which are roughly 30% of the global LNG trade.
If oil fails to move through this region significant amounts of oil will come off global markets making the 0.4mb/d demand revision look like a footnote.
The EIA anticipates that the OPEC oil cartel’s total output in 2020 will be 29.8 million barrels per day, of which 18 million barrels will flow through Hormuz. The other two chokepoints pale in comparison.
1 Mb/d = million barrels per day