US push for OPEC spare capacity could upturn oil market
The United States of America is urging oil rich Saudi Arabia to dig into its spare capacity to augment shortages its sanctions on Iran is causing, but it leaves oil prices vulnerable to future spike should geopolitical crises erupt, experts, warn.
“I think we have a big risk premium coming in that we’re going to run out of spare capacity amid considerable geopolitical disruption risk,” Bob McNally, a veteran OPEC watcher who heads the consultancy Rapidan Energy Group, said during an Atlantic Council event Thursday to SP Global Platts. “When we get this tight, the market wants to be assured that you’ve got cash in the bank if you will.”
A sustained militancy by a group calling themselves the Niger Delta Avengers and the uprising from Libya cut off over a million barrels per day from global oil supply, only a bearish oil market kept prices low. As the 2019 election draws nearer in Nigeria, the risk to oil production is heightened.
This time around, prices have reached four-year highs of $86 per barrel hence digging into spare capacity would eliminate the ability of OPEC’s biggest producers to respond to any future disruptions, raising the risk of a bigger price surge.
However, this reality is lost on Donald Trump, US, president and his energy minister, Rick Perry, who are pressuring Saudi Arabia to force a 1.42 million bpd spare capacity into the market, either from itself or OPEC members.
“The United States continues to engage with OPEC countries and we encourage them to utilise their spare capacity to ensure world oil supply meets the demand,” the State Department said through a spokesperson last week.
Saudi Arabia already feels stretched at the moment. It is now pumping about 10.7 million bpd and can add 1.3 million bpd, its crown prince Mohammed Bin Salman said last week.
The prince also said the kingdom could push capacity beyond 12 million barrels a day with additional investment, and that extra supplies are also available from Saudi Arabia’s allies including Russia and other OPEC members.
The United States is re-imposing sanctions on Iran after quitting an agreement on the country’s nuclear program, and the measures will take full effect in November. It is racing to avert a spike in oil prices, which will raise gasoline prices in the US and hurt chances of Republicans in the November midterm elections.
Rystad Energy, an independent energy research and business intelligence company, observes that the Iranian crude exports dropped materially for the second month in a row in Sep-18. At 1.7 million bpd for September 18, Iranian crude exports are 450,000 bpd below pre-sanctions (average between May 2017 and February 2018) levels of 2.15 million bpd.
The research firm sees the increased likelihood of a larger cut in Iranian exports than its 900,000bpd loss estimate as it awaits news about the US decision on sanction waivers for Japan, India, and others.
The US is allowing countries exemption to buy oil from Iran but on a case-by-case basis.
“The US has moderated its goal of halting all exports of Iranian crude and now expects countries to cut imports by 1 million bpd. Refiners/countries can still apply for US sanction waivers subject to “significantly” reducing purchases of Iranian crude,” Bjørnar Tonhaugen, head of Oil Market Research at Rystad Energy said in a release.
France and South Korea have not taken a single cargo of Iranian crude from Iran since Jun-18, while Japan’s imports have dropped by 83% from pre-sanctions levels to only 22,000bpd for September 18 and are expected to reach nearly zero on October 18.
India and China imported less than their pre-sanctions levels in Aug-18 (Indian liftings dropped 50% m/m from elevated levels in Jul-18). Rystad Energy expects India to cut 50%, but sees risk of India “going to zero” (200,000 bpd downside risk) depending on Indian National Corp.’s ability to make payments in rupees, according to Rystad Energy.