IHS: Where does the USA stand in the new geopolitics of oil?

Fuel BarrelsAs the global powers prepare for the World Economic Forum Annual Meeting to commence on 17 January, IHS Markit Senior Vice President Carlos Pascual analysed the new geopolitics of oil in 2017. Below is a brief extract from the full report which can be viewed on ihsmarkit.com

Oil prices could go up in 2017, thanks to geopolitical events such as instability in the Middle East, a resurgent Russia, and political transitions in the United States and Europe. But North American oil production has the potential to mitigate these geopolitically driven spikes.

Oil supply in 2015 and 2016 consistently outpaced demand by 1-2 million barrels a day. Despite conflict in the Middle East and terrorist attacks from Paris to San Bernardino, oil prices plummeted. Huge inventories dampened fears that instability and conflict could disrupt supply. This year, with an oil market roughly in balance, war, terrorism and political instability could reinject the potential for prices to rise. 

The re-emergence of OPEC (the Organization of Petroleum Exporting Countries) from hibernation shapes today’s market outlook. In November 2014, OPEC did not try to balance oil supply and demand, contending that production cuts would surrender market share to its competitors. Instead, the OPEC countries produced more. Plummeting prices curtailed oil investments both in North America and around the world, and forced a structural shift in global production capacity. 

Two years and cuts of about 1.5 million barrels a day in global output later, OPEC changed strategy in November 2016, collaborating with many non-OPEC producers (notably Russia) to restrict supply for six months in 2017.  Brent oil has jumped from a price band of about $40-50 per barrel to $50-60. 

Forecasting whether such deals will last is always filled with folly, but this we do know:  the economically weakest producers, Nigeria and Libya, were excluded from the cuts. In crippled Venezuela, declining production may have been a foregone conclusion. Iran was allowed an increase it was already achieving, and Iraq will do less than others. For their modest cuts of about 4%, the OPEC countries gained a very substantial increase in net revenue.

Turmoil in oil-rich nations

Against this backdrop of oil, the Middle East promises more instability. President Assad, with Russia’s help, expanded his control of Syria; Aleppo is destroyed, and Syria’s opposition will likely mistrust any political promises that could bring peace. ISIS, meanwhile, may have lost its caliphate, but it has retreated to a war of terror that has long since spread beyond the region. Iraq’s internal fighting threatens to increase once the unifying mission of kicking ISIS out of Mosul is accomplished. The Yemen war seems unwinnable, but none of the parties will accept losing it. 

Iran has grown bolder. With its new Russian alliance in Syria, the country has retained its Syrian supply channel to Hezbollah. The Iran nuclear deal has pushed back the breakout time for a nuclear weapon from two months to a year. Still, Iran has returned to historic levels of oil production and repatriated some frozen bank accounts. All of that has increased the security fears of neighbouring Sunni states. 

The full report can be viewed here

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