THE OIL market’s reaction to the anti-government protests in Iran highlighted the market’s fresh sensitivity to supply-side risks, which until recently had mostly evaporated.
Iran began 2018 on a tense and edgy note with deadly anti-government protests spreading across the country as the economy remains stunted.
The political unrest has not had an impact on the country’s oil production or exports but the country's outlook is uncertain.
US President Donald Trump, a fierce critic of the Iranian government who has stepped up his rhetoric in recent days during street protests in Iran, faces a January 12 deadline to waive sanctions under the nuclear deal. Should Trump re-impose sanctions or otherwise cause the nuclear deal to unravel, up to 800,000 b/d of Iranian crude exports could be at risk.
The price of front-month ICE Brent crude futures averaged at $56.72/barrel in the second half of 2017, up from $52.95/barrel H1 2017 and $49/barrel in H2 2016 and ended the year on two-and-a-half year highs.
So what has raised the market’s sensitivity to supply-side risks?
Eroding surplus, as Opec-led output cuts continue to help rebalance the market and rein in global oil stocks, is playing a big role.
According to data from the Paris-based International Energy Agency, commercial inventories in the OECD countries have been consistently falling in 2017, and were 111 million barrels above their five-year average in November compared with a record high of 380 million barrels earlier in the year.
Opec has had a good stint with its rebalancing efforts, maintaining extremely robust conformity with its November 2016 output cut agreement to date, having surpassed its collective ceiling of 32.74 million b/d only once in 2017.
Opec collectively produced 32.40 million b/d in December, well below its ceiling of 32.74 million b/d, according to an S&P Global Platts survey.
Crisis-wracked Venezuela's crude production in December plunged to 1.70 million b/d - its lowest in more than 15 years. The country has been suffering from a spiraling economic, political and humanitarian crisis, with state oil company PDVSA short of funds, personnel and equipment and suffering under US sanctions that restrict its financing.
Opec kingpin Saudi Arabia maintained its production discipline in December, producing 9.90 million b/d. The country, which has repeatedly declared its intention to “lead by example”on Opec's production cut agreement, produced below its quota of 10.056 million b/d in every month of 2017, according to survey data.
With a renewed output cut agreement in place through the end of 2018 that brings Libya and Nigeria into the fold, Opec enters 2018 brimming with confidence that its market rebalancing efforts will remain on track.
But it is factors outside the bloc's control that will likely determine the success of its efforts to rebalance the oil market. In particular, will US shale production, buoyed by rising oil prices in recent months, surge and undo the Opec/non-Opec cuts? And will global oil demand grow in 2018 as forecast, helping soak up any additional supplies that come onto the market?
Clearly, one headwind for oil prices has been climbing US oil production, but the US Energy Information Administration’s latest Short-Term Energy Outlook, calling for even more output failed to dampen the oil market’s bullish enthusiasm. The 10 million b/d mark is expected to be broken in February and the 11 million b/d barrier in December 2019.
Meanwhile, demand growth expectations are robust led by strong economic growth.
MRIGANKA JAIPURIYAR is Associate Editorial Director, Asia & Middle East Energy News & Analysis.