Frenzy of geopolitical influences threatens oil market
No time in recent past has a combination of geopolitical risks threatened the oil market as we are witnessing presently. Crude oil prices hit a 52-week high in late June as the crisis in Iraq was escalating. Add in the geopolitical tensions in Israel and the Gaza Strip, along with the terrorist attack on Malaysian Airlines Flight 17 in Ukraine, one would have seen $130, $150 or even $170 barrel oil with so much of the world supply at risk. Curiously, oil prices are not pushing much higher than it is right now.
Prices will remain volatile and stay at inflated levels as each of these issues continues to unfold.
Saudis remain suspicious of Iranians
Hassan Rouhani, Iranian President has adopted a conciliatory tone since taking office in 2013. While Mohammad Javad Zarif, Iran’s foreign Minister has visited other Gulf Arab states, he has not yet been to Saudi Arabia. Rapprochement between the two countries would have ramifications across the Middle East, potentially cooling political and military struggles in Syria, Iraq, Lebanon, Bahrain and Yemen.
However, with Riyadh and Tehran giving full-throated backing to opposing sides in Syria’s civil war, and accusing each other of fuelling the bloodshed, the prospects for any meaningful cooperation now appear slim. Sunni Muslim Saudi Arabia and Shi’ite Iran have long supported competing factions in Arab countries, often along sectarian lines. But Iranian backing for Syrian President Bashar al-Assad, and the aid Riyadh has given to rebels trying to oust him, has raised their mutual hostility to unprecedented levels.
Suspicion between the two is deeply rooted, with Saudi Arabia’s ruling princes worried that Iran’s clerical elite remains determined to export the message of its 1979 Islamic Revolution to Shi’ites across the Middle East.
Iranian leaders regard Riyadh as a stooge for their American foes, and remain angry at the Saudi role in backing Iraq during its eight-year war with Iran.
Sanctions still looming on Iran
The P5+1 (a group of six world powers) negotiation over Iran sanctions is currently stalemated. Iran and the West appear to be far apart on issues. Iranians have been sounding confident about their ability to stick to their existing positions that would guarantee them the ability to build a bomb despite Western concerns.
US house of representative members were unequivocal in their stand that congress won’t “budge an inch” on sanctions on Iran unless the country comes clean about the suspected military dimensions of its nuclear program.
In the first in a series of hearings on the ongoing nuclear talks, key members of the House Foreign Affairs panel reiterated their demands that any final agreement contain strong verification procedures.
But they also insisted that Iran allow access to suspected military sites before lawmakers are asked to approve a final deal — or even a six-month extension of the current interim agreement beyond the July deadline, should it prove necessary.
Central to lawmakers’ concerns is Iran’s refusal to allow access to the Parchin military base, which is believed by some to be used as a covert nuclear weapons development site.
As part of such a deal, Iran is likely to demand an easing of all sanctions that address its oil and oil products exports, its use of the international financial system, and its receipt and repatriation of hard currency.
Syria still smolders
The war in Syria smolders on, three years later. Over 11,000 children are dead. One million refugees have flooded over the border into tiny neighbor Lebanon, a country of only four million people to begin with.
International attention to Syria has waned greatly. The Syrian government, however, still restricts entry to critical areas, denies cross-border assistance and monopolizes the distribution of aid through Damascus. The Syrian military surrounds the Damascus suburb where chemical weapons were used in August, and food or medicine cannot be delivered.
Syria has around 2.5 billion barrels of crude oil, which makes it the largest in terms of proven reserves in the eastern Mediterranean, but overall in the global scheme of things, a small player, accounting for less than 1 percent of the world’s output. But this onshore oil—largely concentrated in the east and northeast–was in the past a critical element of the country’s economy, at one time accounting for more than 25 percent of Syria’s economic output. Production has now fallen by 95 percent, while the government has lost control of the oilfields and Islamic rebel groups are engaged in bloody rivalry over them.
A Syrian war also has the potential to further exacerbate tensions in large oil producing countries with significant Shiite populations such as Saudi Arabia and Kuwait.
A commercial jet shot down in disputed airspace
Malaysia Flight 17 was shot down right at the border of Ukraine and Russia. One way or the other, Russia has a hand in the shooting here.
Oil prices jumped on news that a Malaysia Airlines passenger plane went down in eastern Ukraine, as traders worried the crash could become a potential flash point that presented another threat to global crude supplies. Some traders said they were inundated with buy orders as news of the plane crash—and speculation about the cause—rippled through financial markets. Russia pumps more than a tenth of the world’s crude and its standoff with the West over Ukraine has raised concerns among traders that the tensions could lead to an interruption in those supplies.
The geopolitics were tense before the crash happened; a day earlier US imposed tougher sanctions against four major Russian business entities including Rosneft, its largest oil company. The aggressive sanctions were designed to hit President Putin’s inner circle harder for supporting pro-Russian separatists in Ukraine.
The victims include Russian banks and energy and military firms, but Gazprom was spared. US officials say that Putin and Russia have a “clear choice to make between increased costs and sanctions pressure, or de-escalating,” their interference in Ukraine.
European governments have generally been more reluctant than the Americans to slap tougher sanctions on the Russians largely because of Moscow’s energy clout in the region. Some analysts suggested that the desire of Europeans to sidestep truly forceful sanctions to protect their economies should not be underestimated.
Libya’s oil is dependent on who’s controlling the ports
Gaddafi maintained oil production at 1.6 million barrels a day and political control over Libya’s oil terminals and refineries. However, the collapse of the Gaddafi regime reignited tribal and separatist forces in Libya. Tripoli’s control over the Sahara and Gulf of Sirte oilfields was wrested away by armed militias. Oil production plummeted as low as 200,000 barrels. Rebel militias and oil workers union seized control of oil export terminals on the Mediterranean coast and shut down production, a crisis for Italian and Spanish refineries whose feedstock is the light sweet Libyan crude that the Gaddafi regime gladly sold to ENI, Reposal and Total.
The battle over control of ports has now escalated and began to unnerve world oil markets. The Libyan Navy even fired on a Maltese flag oil tanker that loaded contraband crude from a rebel held oil terminal on the Libyan coast.
The crisis has now led to the resignation of five Cabinet Ministers, including the Oil Minister. The risk of a new civil war between Tripoli and the militia held oil ports in the east has never been higher as rebel leader Ibrahim Jedran will not allow Cyrenaica’s oil wealth, (60 per cent of Libyan exports in the Gaddafi era) to be exploited by a government based in Tripoli. Ironically, Ibrahim Jedran once commanded a 30,000 man Petroleum Guard created to protect the oil ports he shut down.
FRANK UZUEGBUNAM