Crude oil - the rise of the fallen

In short term, oil prices may get a further boost from US-Iran standoff

KARACHI: There is a non-stop flow of news coming in from everywhere to support the recent rally in the oil market and it seems that once again geopolitical uncertainties have come to rescue the falling oil prices.

From the expiry of waivers granted to some major buyers of Iranian oil to the unrest in Venezuela and uncertainties in Nigeria and Libya, there was sufficient fuel behind the recent rally. In fact, the over-compliance by the Organisation of the Petroleum Exporting Countries (OPEC) with production cuts (at least until June) was sufficient to keep the bulls fully engaged for the time being.

The trillion-dollar question for any investor now is whether oil can reach the former glory by touching triple digits? To answer this question one has to carefully study both sides of the demand and supply equation to know if something has changed recently. As far as the demand side is concerned, the continued slowdown in global economies, Brexit and the trade war are still pointing towards weakness. However, if we look at the supply side, the situation is a bit complicated and fuzzy, thus providing a perfect breeding ground for speculation.

It is no secret that OPEC, which used to call the shots on the future of oil prices, has found two new rivals, namely Trump and shale oil, which have recently demonstrated the ability to call top and bottom for the oil trend. A recent rally, which kicked off in November 2018 with the Trump tweeting about sanctions on Iran, was interrupted abruptly in the last week of April, when he tweeted back that he had called OPEC to increase production.

Amid all the production cuts and compliance efforts by OPEC+ members and supply disruption from Iran, Venezuela and Nigeria, there is one place on earth where oil is still being explored, refined and pumped at an ever-increasing pace and that is the Permian basin in the US where the shale revolution is fuelling the nation’s dream to export more than Russia and even Saudi Arabia in coming years.

The trend of falling capital expenditures in the past due to falling oil prices is reversing in the US where capacity enhancement and debottlenecking are going on in full swing.

The pace of development in the Permian region may get a further boost with the recent signs of consolidation where oil giants Oxy and Chevron are trying to outbid each other to take over Anadarko Petroleum, a pure play in the Permian region. Now, even the world’s richest man Warren Buffett has joined the bandwagon by putting his weight behind Oxy with a $10-billion commitment if the deal goes through.

All these developments will definitely reignite hopes about the future prospects of oil. After all, if the world’s smartest and richest investor is betting on the future of oil industry besides world giants like Chevron and Oxy jumping queues to outbid each other to pour new investments, this all cannot be for nothing. However, the only thing that these ambitious investments will bring to the oil market, in the long term, is the supply glut and any future rallies will be short-lived until the demand side starts to catch up.

Last but not the least, the effect of renewable energy cannot be ignored considering the falling cost and increased efficiencies. However, for the short term, the posturing and a possible escalation in the Strait of Hormuz where Iran has threatened to close/slow down the world’s busiest shipping route and the resultant deployment of a Nimitz class aircraft carrier by the US may create some impulsive upward movement in the crude price.

Although it seems that China, Turkey and India will have little room left to manoeuvre and avoid compliance with US sanctions, the target to bring down Iran’s oil exports to zero is too unrealistic to achieve and/or sustain for long.

The writer is a financial market enthusiast and attached to Pakistan’s stocks, commodities and emerging technology

 

Published in The Express Tribune, May 13^th, 2019.

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