Today geo-pol takes center stage as Saudi Crown Prince Mohammad bin Salman (MBS) consolidates power in a far reaching sweep to stamp out corruption. However, in the last three to four weeks, bullish geopolitical events have unfolded, each adding about $2/bbl premium to the market. With the oil market now in balance, and global inventories closer to normal levels, we can expect geopolitical events to continue to have an impact on prices. In aggregate, Kurdistan (halted flows on the Ceyhan pipeline), Nigeria (return of the Niger Delta Avengers), Venezuela (debt crisis) and Saudi Arabia (mass purge) are likely to have added about $8 of premium to oil prices.
As OPEC compliance remains high at an average of 95% for the year, multiple sources of possible production disruption are manifesting. In fact, the market has already had to absorb 300kb/d of Iraq oil disruption from the Ceyhan pipeline since mid-October. On November 3, the Niger Delta Avengers, who crippled Nigerian oil production to 1.2Mb/d (from 2Mb/d) in 2016, declared an end to the cease fire and vowed “brutish, brutal and bloody” attacks against oil companies and their assets. This is a sophisticated militant group that should be taken seriously. They have been seen using state-of-the-art diving gear and explosives to blow up deep water pipelines. Last year’s attacks were a wakeup call to many observers as most thought they were only equipped with speedboats and a few riffles. Activities on social media seem to suggest that other militant groups in the area are looking to join the fight. Nigeria is currently producing 1.8Mb/d and is in the process of putting together their 2018 budget. With oil prices at $60, it is possible that the Avengers believe this is an opportune time to “strike while the iron is hot” and get their “payments” worked into the budget. Given recent history, I would say 600kb/d is at risk.
Venezuela President Nicolas Maduro’s announcement of a possible restructuring of PdVSA’s foreign debt sent oil prices higher last week, as the market seems to be evaluating the likelihood of finally seeing a loss of Venezuelan barrels. There are complexities around the price implications of a default, particularly in the absence of regime change. Any refinancing of the current debt is likely to be blocked under US sanctions that prohibit new financing. There already seems to be creditors sniffing around to see what types of assets can be ceased, including oil at sea. This could dissuade purchases of Venezuelan crude… however, since 2014, Venezuela has made great effort to sell most, if not all its barrels on foreign vessels, FOB, transferring title as the crude enters the ship. It is difficult to estimate exactly how many barrels would be at risk in the event of a default.
Lastly, despite MBS’ obvious attempts to consolidate power, the unfolding events in Saudi Arabia do not have a material impact on fundamentals. Instead, it emphasizes the degree to which one can rely on MBS’ vision and spending plans as a crutch for higher oil prices. The Saudi prince is determined to bring the Aramco IPO to market, and by eliminating those who oppose him, he keeps his finger on the scale. I would say the recent purging greatly reduces any uncertainty around an OPEC extension (through 2018) or Saudi’s resolve for higher prices.
However, at $57.30 for WTI, one would have to believe that shale response will be strong, if not massive come 1Q18. The market is likely getting complacent about US shale production, as rig counts continue to decline, and muted production growth which has been masked by the hurricanes; large Texas declines (-108kb/d) have been more than offset by meaningful growth in other regions. The market might be taken off guard when, not if, Texas fully recovers.
It looks like the bullish thesis has finally achieved market consensus. Managed money players added about 95,000 contracts w/w, pushing Brent net length to the record highs… higher than January’s post OPEC cut euphoria. WTI net length increase continues to be largely driven by a decrease in shorts while Brent keeps seeing the entrance of new length. The research community over the last few weeks has revised end of year targets by as much as $10/bbl. Strong demand, a disciplined OPEC and non-stop geopolitical risk keeps pushing the market higher.