Crude oil on the brink of crisis

 

Brent crude hit a nine-month high inching past $117 a barrel as the United States said it could send military advisers to Iraq, raising concerns about the escalating conflict.

Meanwhile, Iraqi government forces continued to battle Sunni militants for control of Iraq’s biggest refinery as US President Barack Obama said the United States will send up to 300 military advisers to Iraq to combat the extremist insurgency. The Baiji refinery near Tikrit, 200 km north of the Iraqi capital, remained under siege as troops loyal to the Shi’ite-led government held off insurgents from the Islamic State of Iraq and the Levant and its allies who stormed the perimeter, threatening national energy supplies. 

While fighting between Sunni militants and government-led forces continued north of Baghdad, the conflict had not yet spread to the country’s southern regions, where most of Iraq’s 3.3 million bpd of oil production is processed. Fire broke out previously after militants attacked the 310,000-b/d hydroskimming and hydrocracking refinery in Salahudin province.

The implication is that Baghdad will need to import more oil products to meet its own domestic consumption in addition to its 300,000 barrels per day refinery that stays closed which further tightens oil markets.

$150 per barrel? It’s possible

Uncertainty over potential export disruptions from Iraq has caused spike in the crude prices. If the situation worsens in Iraq, a major oil-producing country, the price of oil could continue to push higher. If Iraq’s recent 3 million barrels per day was also taken out, we would be talking about a significant disruption in world oil supplies.

Although the consequences for Iraqi oil production of what has happened so far appear to be minimal, all this comes at a time when the earlier and still ongoing conflicts in Libya and Syria have already disrupted nearly 2 million barrels per day in world oil production. 

Since the toppling of Muammer Gaddafi in 2011, successive Libyan governments have struggled to impose order as heavily armed former rebel brigades carve out their own fiefdoms. The violence in Libya comes just weeks after the resumption of oil exports following a nine—month blockade of sea terminals by rebels. 

Ukraine is a major conduit for Russian oil and gas exports to Western Europe, and analysts fear that an escalation of the crisis could hit supplies and send prices soaring.

In addition to the uncertainty about the geopolitical tensions, there are other pressures on crude prices. China has been purchasing oil for its strategic reserves, even though prices are high. The China is squabbling with Japan and Vietnam over territory, and the country wants to build up its reserves to 100 days of net imports by 2020.

The first phase of China’s strategic build-up amounted to 103 million barrels and was completed in 2009. The second phase was supposed to add 169 million barrels to the reserve but has been raised to 245 million barrels. The second phase is expected to be completed by 2015. The country is now building storage tanks for the third phase to hold an additional 152 million barrels.

That is 500 million barrels, of which most could have been left in the ground, just as most of the 750 million barrels in the US strategic reserve could have been. That unnecessary demand plays a significant role in the rising price of crude, regardless of whether a producer sells to China.

Some analysts say $125 per barrel for Brent – near the highs hit in 2011 and 2012 – is on their watch list while others have said the Brent peak near $150 in mid-2008 could be in play.

Another economic recession? 

Curiously, the current uncertainty surrounding the crude oil prices are not sparking fears among economists of a major global economic slowdown yet but the fear is gradually creeping in. Generally, analysts say a $10 rise in oil prices slices 0.2 to 0.3 percentage points off of global growth which means so far, the dip in oil prices may be causing a 0.15 percent decline in global GDP.

While global economic growth has been slow since the Brent price rose above $100 per barrel, if history is any indication, oil prices would need to rise past $120 per barrel to sharply slow economic activity.

Global oil stocks react

Traders are bracing for more volatility in markets. Oil stocks hit new 52-week high more to the geopolitical tensions that are currently rattling the crude oil prices. From around $89 in early February, ExxonMobil share climbed nearly 15 percent and posted a new 52-week high of $104.06. Shares of Chevron closed at $132.34. ConocoPhillips shares are up more than 31 percent since early February. The consensus price target on Conoco’s shares is about $85.60, and shares closed at $85.36. Occidental Petroleum shares closed at $104.14. The stock is up about 13 percent in the past 12 months. Since early February, shares are up 15 percent. 

FRANK UZUEGBUNAM

Source:  http://businessdayonline.com/2014/06/crude-oil-on-the-brink-of-crisis/#.U6pCfbFxqMV

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