Turkey Coup
As the news broke about the Turkey coup, oil prices shot up right before the electronic close on Friday. The reason is that Turkey is a key transportation hub for global oil supply.
Close to 3% of the globe’s daily oil supply travels through the Turkish straits between the Black Sea and the Mediterranean. As the coup unfolded, reports that the Turkish Straits were closed for a short period of time raised big concerns about supply but now with the coup attempt over, the larger question is what will this mean for Turkey and the rest of the world. With reports that President Recep Tayyip Erdogan is talking about bringing back the death penalty and arresting 6000 members of the judiciary and military, it could add instability in one of the world’s most important energy transportation regions. Yet with the oil still flowing, oil market is easing but the tensions surrounding the coup may not.
The Energy Information Administration (EIA) says an estimated 2.9 million barrels of oil a day flowed through the Turkish Straits in 2013. About 70% of this volume was crude oil and the remainder was petroleum products. These Black Sea ports are among the primary oil export routes for Russia and other Eurasian countries, including Azerbaijan and Kazakhstan. Oil shipments through the Turkish Straits decreased from more than 3.4 million barrel per day at its peak in 2004 to 2.6 million barrels per day in 2006 as Russia shifted crude oil exports toward the Baltic ports. Traffic through the Turkish Straits increased from 2010-2011 as crude production and exports from Azerbaijan and Kazakhstan increased.
Turkey also has important oil and natural gas pipelines. Oil comes from Azerbaijan and one from Iraq. Recently those pipelines have moved about 1.3 million barrels of oil a day well below its 2.7-million-barrel capacity due to ISIS attacks in Iran.
Obviously the oil market is pleased that oil is continuing to flow, even as Turkish government may fall into a dictatorship. Warnings from the U.S. and the EU to have Turkey respect the rule of law and there is no excuse to end democracy. With events unfolding, oil traders will be on guard.
There are reports that a group of independent U.S. producers want the government to limit foreign imports of crude. A group called, “The Panhandle Import Reduction Initiative” has begun campaigning for quotas on all foreign suppliers excluding Canada and Mexico. Its founders, Texas and New Mexico oilmen, said Saudi Arabia is trying to crush their industry and it’s time to fight back according to the FT. “It’s not fair and it’s not free when a country is trying to drive individual producers in the United States out of business,” said Tom Cambridge, an oil producer in Amarillo, Texas. “What we would like to do is limit imports.”
The FT reports that Middle East’s share of world oil supplies has risen to 35 per cent, the highest since the 1970s, according to the International Energy Agency. The number of U.S. oil drilling rigs has dropped 78 per cent to 357, according to Baker Hughes. The U.S. recently imported 8.1m barrels per day of crude oil, 11.2 per cent above last year. U.S. refineries processed 16.6m b/d of crude, roughly unchanged from 2015.
Natural gas is on the rise as the U.S. is getting ready for record breaking heat. The U.S. power grid is going to see a challenge as we will see record natural gas power burns to keep the lights and air conditioning on. This comes as the U.S. ramps up exports of LNG and is sending gas to Asia and the Middle East. It is going to be crazy!