Three important drivers of the oil market were brought into sharp focus this week. One concerned supply, another demand, and a third centred on the balance of the two. Most dramatic, at least in its impact on crude prices, was news that Iraqi forces had moved to takeover producing fields in Kurdish territory, threatening the supply of up to 600,000 barrels of oil a day (bopd).
The latest sign of deteriorating relations between Baghdad and the Kurdistan Regional Government (KRG) rocked the shares prices of Gulf Keystone Petroleum (GKP) and Genel Energy (GENL) – two London-listed stocks with production in the region – and more importantly, the oil price itself. Brent crude jumped 3 per cent in early trading on Monday 16 October to more than $58 a barrel, as traders weighed the risks facing a major source of production, and a key pipeline connecting Kirkuk with Turkey. By the time we went to press just two days later, the situation appeared to have calmed, although not without the forced transfer of several major state-operated oilfields – among them Bai Hasan and Avana, northwest of Kirkuk – into Baghdad’s hands. Iraqi officials reported that all fields were operating normally.
Reports that the fields were taken with the cooperation of Kurdish forces – albeit bafflingly after the region’s recent vote for independence – may have paused a rally in crude prices, but cast an uncertain future over the region’s production. Fatih Birol, executive director of the International Energy Agency (IEA), acknowledged as much when he told Reuters that “these issues remind us oil and geopolitics are very much interlinked and it will remain so”.
Understanding how these competing forces will play out is the perennial focus of the IEA, which also published its monthly review of the oil market this week. The key takeaway: Saudi and Russia-brokered commitments to cut supply have certainly helped balance the market, but “continued discipline” will be required for prices to stay above $50 a barrel throughout 2018. The IEA’s clear message, therefore, is that Opec must reiterate pledges to cut output when the cartel meets in Vienna at the end of next month. Saudi Aramco’s recent commitment to cut next month’s exports by 560,000 bopd is a notable step in that direction. Oil bulls have also been encouraged by noises from Vladimir Putin that Russia could continue to participate in Opec’s production freeze until the end of 2018.
In the longer term, the IEA’s latest report suggested that – a recent flattening of the US onshore rig count notwithstanding – the market continues to underestimate the power of US shale production. Elsewhere, the agency suggested the impact of electric vehicles on oil demand would remain muted until 2022, particularly as the bulk of demand growth is set to come from other sources, including shipping, aviation and petrochemicals. Furthermore, the IEA suggested that except for growth in Asian demand, “we see less uncertainty: growth will continue...and while there has been much discussion and debate about a peak in oil demand, we see no such peak in sight”.
This view was echoed by industry consultancy Wood Mackenzie, which this week published a report suggesting that while changes in transport technology will erode demand for fuels and lead to a “fundamental structural shift”, peak demand is unlikely to occur before 2035. The gradual decline in demand from OECD countries will continue to be outpaced by increasing need for oil from the rest of the world.
