Despite geopolitical tensions oil prices are down. Nevertheless they are impacted by political turmoil. Possibly there will be a delayed effect from overproduction and long-term problems.
Oil prices fall to lowest point in 14 months
The advances by IS in Iraq caused oil prices to climb to 115 dollars per barrel by June. However, it soon became apparent that the events in the region were not affecting oil production there. The financial markets regained a measure of composure and oil prices started to fall. A lower demand for oil, combined with reports that oil production levels were still sufficient, forced the Brent price down to below 100 dollars per barrel: the lowest oil price in 14 months.
Kurdistan in Iraq increased its oil production, and indications emerged that Libya was also exporting more. All in all, OPEC’s oil production totalled 29.91 million barrels per day. Combined with the increasing oil production in non-OPEC countries such as the United States and Canada, this meant an ample supply.
Geopolitical tensions are nevertheless having an impact
The possibility of political decisions causing shortfalls in oil production has become less of a concern. As a consequence oil prices have not risen sharply, and the geopolitical tensions appear to be having a minimal impact. Yet normally oil prices should fall more sharply during times of overcapacity. As such, ABN AMRO stresses that the geopolitical turmoil is in fact having an impact: while prices have not risen, they have not fallen further either.
Once the situation becomes less tense, oil production might rise and risk premiums might drop. Oil prices could fall further and faster. If the geopolitical tensions increase, restrictions might be imposed on production and export, which may force oil prices up. For the next two years, ABN AMRO expects oil prices to fall slightly and demand to increase somewhat. The supply of oil will also increase gradually, principally as a result of increasing production by non-OPEC countries.
Impact of turmoil pushed back to the more distant future
Although oil prices might fall further in the short term, mainly as a result of overproduction, the risk exists that prices will rise in the more distant future. This risk will increase as the production capacity fails to meet the rising demand worldwide. As matters stand, the market expects that the demand for oil can amply be matched by the volumes produced. Yet ABN AMRO fears that the impact of the crisis in Iraq and the sanctions against Russia might cause problems in the longer term. For example, the possibilities for considerably increasing oil production levels have become significantly more doubtful.
Iraq would need to double its oil production to even partially compensate the higher demand for oil worldwide: it is expected that Saudi Arabia’s reserve capacity will not be enough to fully compensate for the higher demand, even in combination with the increased oil production in non-OPEC countries. It is moreover highly undesirable for Saudi Arabia to use its entire reserve capacity and so negate its role as swing producer. The market – and consequently oil prices – would become wholly dependent on the caprices of geopolitical tensions and temporary disruptions in production.
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