The One Region Oil Markets cannot ignore 2020

The year that ended was a turbulent one for the Middle East. While oil prices stubbornly refused to respond to efforts to push them up and remained in a narrow and uncomfortable area, a series of attacks exacerbated tensions in the region and warned many that hostility was between Saudi Arabia and Tehran could escalate overt military clash. Will 2020 be different?

Hardly for oil prices. The International Energy Agency announced earlier this month that it expects global oil supply surpluses of 700,000 bpd in the first months of the new year. Last week, Russian energy minister Alexander Novak said he expected OPEC + to discuss easing the lower production ceilings it had agreed on at a meeting in March.

While a discussion does not mean relaxation, the possibility of reversing some or all of the additional cuts just three months after OPEC + approval is enough to increase price pressure.

Saudi Arabia and Kuwait eventually agreed to resume operations on two common oil fields in the neutral zone between the two countries as pressure on oil prices continues to increase. The fields’ production capacity is half a million barrels a day, The National reported, citing a refinitive analyst who added that while it will take some time to feel the impact on oil prices, it will eventually become apparent ,

“The addition of 100,000 to 200,000 barrels of sour will not be felt initially, but once it moves to 300,000 bpd, this could be a problem for Opec +,” Ehsan Ul-Haq told the Emirati daily.

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As for the geopolitical situation, events this year strongly suggest that an open confrontation led by Saudi Arabia and Iran is highly unlikely. There were tanker attacks by the Saudis – and the United States – on Iran. There were tanker arrests and exchanges between Iran and Britain. Freight rates for the Strait of Hormuz rose as tank insurance prices skyrocketed and a number of countries used ships to patrol the world’s largest oil checkpoint.

Finally, there were attacks on Saudi oil production, which were the highlight of the year for many as they temporarily took a production capacity of 5.7 million bpd off the market. Even these attacks, for which Riyadh and Washington blamed Tehran, although the Yemeni Houthis assumed responsibility, did not wage an open war on the two largest powers in the Middle East.

Bloomberg, citing analysts from Citi, reported earlier this week that the risk of geopolitical disruption in the Middle East had not disappeared, and that risk had nevertheless been greatly devalued by the markets that we believe were more prone to disruption.

This is not a good sign for the region’s oil-dependent economies. Since many are still struggling to return to growth given the high oil prices, Fitch has predicted deficits for a few years, which could deepen over the next year if the oil price continues to fall. This in turn will exacerbate the social and political problems that are already emerging due to high unemployment and poor governance, Bloomberg’s Netty Ismail cited a director of Fitch Ratings.

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“Reforms to stabilize public and external finances for both oil importers and some exporters are at risk of further social and political setbacks,” said Krisjanis Krustins.

This problem could be particularly worrying for Saudi Arabia if Aramco stocks fail to deliver on the promise of solid returns. Many ordinary Saudis have borrowed money to buy from the state-owned oil giant, and if they lose that money or make no profit from it, Riyadh may have a bigger problem than oil prices.

By Irina Slav for Oilprice.com

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