Last week’s performance of oil was lackluster and directionless despite the US-China trade agreement. Brent tested the $65 per barrel mark several times but was not really able to hold the gains. This is understandable when reading the monthly oil market report of the International Energy Agency (IEA), which predicted a demand growth of 1.2 million barrels per day (bpd) for 2020 and a supply growth of 2.1 million bpd from non-OPEC countries. This supply overhang occurs despite Iranian production falling to 2 million bpd of which only 300,000 bpd were exported in December due to sanctions and Venezuela’s production going from 700,000 bpd to a virtual standstill due to both sanctions and disintegration of the economy. Gone was the temporary geopolitical premium as a result of the killing of the Iranian Gen. Qassem Soleimani by a US drone near Baghdad airport. All of that changed over the weekend when Libyan military commander Khalifa Haftar stopped exports by shutting down a pipeline under his control. This forced the National Oil Corporation, Libya’s national oil company, which is under the control of Prime Minister Fayez Al-Sarraj’s UN-recognized Libyan government, to shut down two major oil fields and declare force majeure. Production is expected to decline by more than 800,000 bpd from 1.2 million bpd. Exports will be expected to be below 100,000 bpd, which according to Bloomberg is the lowest since 2011. All of this happened while the Berlin conference tried to kickstart a peace process in the north African country by bringing together Al-Sarraj’s government with rebel leader Haftar alongside world leaders such as Turkey’s President Recep Tayyip Erdogan, Russian President Vladimir Putin, UN Secretary-General Antonio Guterres, US Secretary of State Mike Pompeo, French President Emmanuel Macron, Italian Prime Minister Giuseppe Conte, German Chancellor Angela Merkel and various leaders from the Middle East including Egyptian President Abdel Fattah El-Sisi and the Crown Prince of Abu Dhabi Mohammed bin Zayed Al-Nahyan. The leaders came to a sort of compromise honoring the UN-imposed arms embargo and agreeing to a roadmap to achieve a cease-fire. Alas, the pipeline remains closed. At the same time, the security situation in Iraq is not improving and oil production was temporarily stopped at one oilfield, with a second one at risk. The IEA had raised concerns about the stability of supplies from OPEC’s second-largest producer. Iraq has managed to double its production to 4 million bpd since 2010. Both China and India receive 1 million bpd from the country, as does Europe. We should not be unduly concerned because the overall supply and demand picture still looks relaxed, courtesy of the anticipated demand overhang by non-OPEC nations. At the same time OPEC, and particularly Saudi Arabia, has considerable spare capacity. The organization and its 10 non-OPEC friends have after all taken 1.7 million bpd out of production to balance the market. Brent jumped 1.6 percent after Friday temporarily flirting with the $66 per barrel mark on early Monday morning. It has come down around 80 cents since then. As long as the demand and supply picture remains relaxed and non-OPEC supply remains strong courtesy of OPEC spare capacity, US shale oil and producers from Canada, Norway, Brazil, etc., geopolitical tensions in the Middle East will remain event risks, resulting in temporary spikes of the price. However, should there be a persistent threat to the flow of oil from the Middle East due to, for instance, a prolonged closing of the Strait of Hormuz, the situation would need to be reassessed. – AN
