Latest Crude Oil Bull Run Highlights Geopolitical Events
LONDON: Crude Oil’s latest bull run, which saw Brent soar to its highest level since 2014 on Tuesday, has put geopolitics front and center in the market.
After spending the last year worrying about supply, markets and investors suddenly seem more frightened by the assumptions of global politics and its impact on the ever-tight supply.
This week’s drone attack by Iran-backed Houthi rebels on the United Arab Emirates, along with fears that Russia’s aggression on neighboring Ukraine could lead to war, are pushing crude prices on the rise. The spike comes despite the view in some circles that supply issues are easing compared to last year. A consensus view from energy analysts suggests that current geopolitical events, primarily rising tensions in the Middle East and rattling Russia, have added nearly 12% to the price per barrel of crude oil.
Alan Gelder, vice president of refining, chemicals and petroleum markets at British energy consultant Wood Mackenzie, said: “Globally, geopolitics currently accounts for around $10 of the price of oil.” Following the attack in the United Arab Emirates, Goldman Sachs revised its price forecast upwards, warning on Tuesday that Brent could reach $90 a barrel in the next two months and hit $100 in the second half of this year. However, Gelder thinks triple-digit oil prices could prove to be way off target.
He told Arab News: “We don’t think the oil market will be as tight in 2022 as it was in 2021. We expect US oil production to increase as the investment discipline in recent years will now allow companies to drill down and increase the investment supply while obtaining high returns for investors.
He added, “You can never say never, but we think the $100 oil forecast is slightly overstated. The number of rigs is increasing in the United States, albeit modestly, so supply will increase this year. Geopolitical events are of course difficult to predict and are capable of causing further price shocks, although it would take an extreme production scandal at a major supplier for the current supply and demand fundamentals to be impacted. That said, it’s worth remembering that geopolitical events were behind the first big jump in oil prices last year.
In March 2021, just after OPEC and its OPEC+ allies announced they would stick to their production cuts, the Houthi militia launched a failed attack on oil export terminals and the Ras Tanura refinery in Saudi Arabia.
There was no damage at Ras Tanura, but the attack sent Brent crude briefly above $70 a barrel.
The six-year war in Yemen, where Saudi Arabia leads a coalition of countries fighting the Iran-backed Houthis, has seen a number of attacks on the Kingdom’s energy infrastructure and tankers in the Red Sea and the Persian Gulf.
Indeed, a report released last month by a respected Washington-based think tank, the Center for Strategic and International Studies, said Houthi attacks on Saudi Arabia had more than doubled in the first nine months of the war. 2021 compared to the same period a year earlier. The report said Iran’s Islamic Revolutionary Guard Corps and Lebanon’s Hezbollah militia played a critical role in providing the Houthis with weapons, technology and training.
Concerns about potential price disruptions to Saudi production should also be coupled with the unlikelihood of an easing of sanctions on Iran – a huge crude producer, but whose meager exports now depend on smuggling.
Fast forward to today, and bloody unrest in Kazakhstan — an OPEC+ member and the former Soviet Union’s second-largest oil producer at nearly 2 million barrels a day — had already spiked Brent by almost 5% at the start of this month, to $83. Ironically, the first protests against the government were sparked by an increase in the price of liquefied petroleum gas, which many Kazakhs use to power their cars.
The UAE attack, which brought Brent one step closer to $90 Goldman Sachs, is the Houthis’ biggest strike against the Emirates since its military withdrawal from the conflict in Yemen in 2019, although it still supports the forces fighting the Houthis.
Meanwhile, the buildup of Russian troops on the Ukrainian border and fears that Vladimir Putin will invade, triggering a NATO response of economic sanctions, or in the worst-case scenario, a wider conflict, are pushing prices even higher. .
Tensions over Gazprom’s Nord Stream 2 gas pipeline project have already played a significant role in soaring gas prices across Europe. Gas prices have fallen sharply so far this year, but Ukraine is a vital supply route for Russian oil and gas supplies to Europe, which relies heavily on Russia for its energy needs .
Giovanni Staunovo, energy strategist at UBS, said: “There is probably also a geopolitical risk premium linked to the tensions in Eastern Europe and the Middle East, which is however difficult to quantify. Historically, these risk premiums remained in the price only if these tensions caused supply disruptions. That said, there are currently no disruptions.
A more relevant risk to oil prices may lie in market fundamentals, primarily concerns over OPEC’s ability to pump more crude if higher demand demands it. Several OPEC members have struggled to increase production to required quota levels, and speaking this week, Saudi Energy Minister Prince Abdulaziz bin Salman said the Kingdom had no intends to make up for its production shortfalls.
Staunovo said: “Some oil demand concerns related to the omicron variant have not materialized, with oil demand holding up better than some feared in December. But the oil market is tight, with inventories of oil, crude oil and petroleum products, at a multi-year low, and if oil demand continues to recover to 2019 levels, available spare capacity is also expected to fall to low levels, making oil market and prices that are very sensitive to any disruption in supply.