The inventory levels, albeit have drained some barrels are still 170 million above five year moving average. Rig count has fallen but is still high, almost double, as compared to last year. Shale production, more or less, stable, and/or growing. The OPEC and NOPEC meeting is due in November. But without deeper cuts the effect on the markets might be short-lived. Extending the deal further can help to maintain the status-quo, but not improve it.
Back to Middle-East. There are three important developments. The recent meeting between Saudi monarch and Russian president. The upshots of Iraqi referendum. And Joint Comprehensive Plan of Action, as Iran deal is formally known. The first one has the potential to affect the markets in a very substantial way, for the longer-term. The second can cause some undulations in prices but ephemerally. Impact of the third scenario can range from slight to nominal but, followed by sanctions, it has the prowess to upend the Vienna accord and, in the wake of it, causing another price crash.
The meeting between Saudi monarch and Putin shows how oil can help to lubricate relationships at international level. Both the parties in question are at the opposite side on the matter of Syria. KSA, a US ally, is against Bashar-Al-Assad whereas Russia sides with Iran, the arch-rival of KSA, in order to support the Syrian president. However, both of the countries have much more in common than their differences. The economic milieu is not promising in Russia thanks to the double-whammy of sanctions, ratcheted up after the Crimean annexation and the fall in oil prices (for every $1 dollar fall in oil, the country loses $2 billion in revenue). KSA is ready to tackle a $53billion budget deficit even as prices have recovered almost 20% this year (KSA has been posting budget deficits for past 3 years). The masses in wont of the government largess in shape of subsidies, holidays and lax tax policies will now need to learn to live without these, albeit, gradually. Hence, the burgeoning amity between the two countries in question has room to go a long way, or at-least, until the oil prices recover to levels that can help heal the wounds of budget deficits and fall in revenue. This also bodes well for the oil prices as much, rather all, depends upon the cooperation between the two said countries.
The events after the Iraqi referendum should not come as a surprise to anyone. Turkey and Iran’s opposition also. Kirkuk, which contains 10% of Iraq’s oil, if fall under the control of Kurds, the ensuing autonomy a result of oil revenues and a vantage point owing to their strategic position, will not be acceptable to Iraq or for that matter even Turkey as booth countries have Kurdish population. This can fan the flames of a referendum streak threatening stability in countries with Kurd population (namely Turkey and Iran). The principle of “identity” will clearly and evidently play its role. If Turkey closes the Ceyhan pipeline, the only one that carries oil from Iraq to a Turkish port in Mediterranean, we can expect a quick surge in oil prices, but once again only temporarily.
The other side of the picture is the conundrum US needs to solve: whom to support? If it supports PMF (Popular Mobilization Forces) as Al-Has Al Sha’abi is known, it provides room to Iran to grow their influence further in Iraq, as the umbrella organization is controlled by the former. If it supports Kurds (Kurdistan Regional Government) it can result in further escalation, exacerbating conditions in a region that cannot afford a new conflict. As of today, 17th October, 2017, Iraqi forces have seized the oil city of Kirkuk. It remains to be seen if there is any retaliation from Kurds.
Iran deal may not affect oil markets directly, immediately or fundamentally (slightly, may be) but it has a profound link with the market sentiment, moreover, with Vienna accord, the only thing preventing oil prices to crash anew. Observers expect Trump will not abandon the deal but refuse to certify. However, given the whimsical nature of the president, he has threatened Iran with new sanctions. But for a strong impact of these sanctions Trump requires support from Asia and Europe which doesn’t seem to happen. The effect on Iran’s oil sales may be limited, an article in Bloomberg says.
But there is another side to it. What if, a new round of sanctions, starts to seep through and weakens the commitment of the country to continue being a party to Vienna accord? Recall that when this string of meetings and calls began in order to control falling oil prices, Iran declined to participate (justifying that they just recovered from sanctions and need to pump more barrels in order to bring in revenue). If this happens, other countries may follow suit. The Vienna accord can go to pieces. Libya and Nigeria are already exempted. Adding all this up prognosticates another oil price crash. Because it is only this deal that has been primarily holding oil prices at this level. Cemented further by its extension till March 2018 and supported by the hope of another extension when OPEC and NOPEC members meet in November.
The rendezvous between Saudi monarch and Putin plus the Iraqi referendum might help to push prices upward. But Iran’s commitment, like Russia’s, is a lifeline to the oil deal and subsequently, a quintessential condition to maintain, if not improve, the current market sentiment (which is positive). Only time can tell what happens. But it is always better to identify the trends, it is the best we can do.