Focus in the global Oil market looks to be slowly shifting from the insurgence in Iraq to the potential near-term downside risks.
Attention is likely to shift to the prospect of an Iranian nuclear deal that would lift sanctions on Iran's oil exports and of a reopening of oil ports in Libya.
A normalisation of production in Iran and Libya may drive the oil price markedly lower from the current level of just below USD112/bbl.
After a couple of weeks with full attention on the insurgence in Iraq, focus in the oil market looks to be slowly shifting to the potential downside risks looming in the near term. As we have argued previously, the short-term risk to Iraq’s oil production from the recent disturbance appears limited (see Research Commodities - Insurgence puts great Iraqi potential at risk, from 26 June 2014). Consequently, the oil price has gradually retreated over the past week and has now dipped back below USD112/bbl.
In the near term, we are particularly looking at two factors which may drive the oil price markedly lower: 1) a deal on Iran’s nuclear programme. The deadline for a new deal on the nuclear programme is 20 July. Today, Iran and the so-called P5+1 resume negotiations in Vienna. If the two sides are able to reach an agreement on a more permanent deal that constrains Iran’s nuclear programme, it would most likely suspend or lift sanctions on Iran’s oil exports. In this case, Iran would be less of a nuclear threat and global oil production would increase – Iran has lost around 1mb/d in output since the sanctions were put in place in 2012. Both factors would drive the oil price lower. 2) Progress in Libya. Apparently, rebels in the east are ready to lift a blockade of the Es Snider and the Ras Lanuf oil ports – the former is the country’s biggest oil port. Libya’s oil production has been shut down for a year now, but with major oil ports in the east looking to reopen, the prospect of a normalisation of Libyan oil production is rising. A full normalisation would add around 1mb/d to Libya’s current crude output and further drag down the oil price.
Hence, with a fair chance that output in Iran and Libya could begin to normalise over the coming months, risks to the oil price are probably tilted to the downside. However, a jump in production in Iran and Libya would put pressure on OPEC’s current output target at 30mb/d. In this situation, Saudi Arabia would probably act as swing producer and adjust its output lower to alleviate some of the downwards pressure on the oil price.
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