Home | Comment & Analysis    Monday 9 July 2018

A Looming Oil Shock?

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By: Alsir Sidahmed

A state of uncertainty and ambiguity is all over the world. Thanks to the bullying policies of US President Donald Trump, who, in effect, is shaking the foundation of the World Order that has been established seven decades ago. Two issues came to the forefront: the trade war he launched with foes and allies alike from Canada to China to the European Union and threaten to move into an overall world trade war that may lead to an economic recession that is going to hurt everyone. And the other issue is to curtail Iran in an effort that either leads to regime change or a change in its behaviour.

One of the important cards Trump is going to play is to sanction Iranian oil industry and pressure others not to buy Iran crude as of come November. With exports amounting to 2.8 million barrels per day (bpd), Iran comes third as exporter within OPEC, but more important Trump’s moves to remove the Iranian oil from the market comes at a time there is great possibility that the market is moving into a tight situation given the growing demand because of economic growth coupled with inability of a number of producing countries to pump at capacity for variety of reasons.

In addition to Iran, other countries like Venezuela, Libya, Angola and Nigeria fail to produce the level they want to due to reasons related to security or affected by issues to do with the industry in these countries. And that is why OPEC decided in its meeting last month to opt for easing its 2017 agreement that calls for cutting production inside and outside OPEC by 1.8 million bpd though the original deal was to keep that production volume off the market till the year-end. Instead, it has been decided to pump additional one million bpd, but Trump who is facing mid-term elections and was not happy with the high gasoline prices started to press publicly OPEC and Saudi Arabia, in particular, to pump more oil to cool down prices.

Saudi Arabia announced that last month its production topped 10.48 million bpd, which is the highest level of crude that the kingdom produced. That leaves 1.5 million bpd spare capacity to be deployed whenever there is a cut in supplies for security or whatever reason, but that figure for a world demand that hovers around 100 million bpd shows clearly how precarious is the situation. Moreover, that spare capacity has not been tested before.

As a result, some analysts don’t rule out the spike in oil prices that can easily cross the psychological $100 a barrel bar unless the United States resorts to its 713 million barrels Strategic Petroleum Reserves (SPR) and draw down some supplies to fill the gap and keep prices under control.

Regardless of whatever happens the current situation brings to mind two cases where the tight market exploded into an open oil shock. The reference is to the 1973 price spike that coincided with the Arab Israeli war, then six years the second shock that followed the Iranian Revolution. And in such conditions, the issue of energy security is highlighted.

And that brings the issue to the doors of Sudan, which has its own problems in securing enough oil supplies to run its business. The long queues before gasoline filling stations a couple of months ago points clearly to the difficult days ahead as the oil market is turning into a buyers’ one. In such a market, it is not only enough to have sufficient funds to purchase, but securing supplies at any price may come to a problem as the second oil shock during the Iranian Revolution showed.

The recent deal with South Sudan that involves rehabilitating the oil industry in that country, use Sudanese technical expertise and downstream facilities could provide some relief through the transit fees that Sudan can levy in cash or kind, but eventually guaranteeing energy security for the country requires boosting domestic production at least to the level of meeting local consumption. Despite losing some 75 per cent of its known oil reserves, but still, Sudan has enough oil that needs to be tapped. That is an achievable goal if there is a political will, a clear agenda and rational prioritizing of what needs to be done.



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