x Abu Dhabi, UAETuesday 25 July 2017

Fears fade over energy supply shortage

Worries over the oil supply are nowhere near as drastic as a year earlier, and it is positive economic data out of China and the United States that has done much to bolster prices.

Economic data out of China and the United States has done much to bolster energy prices. EPA / WU HONG
Economic data out of China and the United States has done much to bolster energy prices. EPA / WU HONG

About this time last year, supply fears were propping up crude prices.

A new round of sanctions had stirred Iran into frenzied sabre-rattling, causing concern that it would block the Strait of Hormuz, the waterway passed by the vast majority of oil produced in the Arabian Gulf.

Market anxiety was compounded by uncertainty over how the sanctions aimed at Iran's oil exports would affect the global supply situation: would Saudi Arabia make use of its spare capacity to offset any shortfall?

While the civil war in Libya produced a favourable outcome, the country's pumps had come to a standstill, depriving the European market of one of its prime sources.

A precarious supply situation trumped a rather dismal demand outlook, as the European economies remained mired in recession, and the Chinese economic locomotive appeared to be slowing.

The oil price, the Brent benchmark in particular, still enjoys considerable support at the beginning of the year, but for more palatable reasons.

Worries over supply are nowhere near as drastic as a year earlier, and it is positive economic data out of China and the United States that has done much to bolster prices.

"The best-performing sector at the start of 2013 has been the energy sector, which just like the previous two years has kicked off with solid gains," said Ole Hansen, the head of commodity research at Saxo Bank.

"This time around, the advance came primarily on the back of raised growth and demand expectations from the world's two biggest consumers - the US and China - as geopolitical worries have so far been subdued."

Iran has for some time refrained from any threats, and the market has easily absorbed the effects of the sanctions, which by some estimates halved Iranian exports. Libya has come back strong, and is pumping at close to pre-war levels.

Against this backdrop, Brent could move to the upper end of the US$105 to $115 a barrel range it has been trading in over the past six months, Mr Hansen believes.

"Momentum and investor sentiment remain positive, which could now carry it forward to test the top of this range despite limited fundamental support for such a move," he said.

There are, however, some storm clouds on the horizon. US politicians have yet to decide on the scale of spending cuts that are part of the negotiations that averted the fiscal cliff at the beginning of the year. There are also those who caution over unfettered optimism that China's economy will grow unhindered.

"The prospects for the Chinese economy, ultimately the main driver of the country's demand [for oil], are as clear as the Beijing sky," said the International Energy Agency, referring to the pollution that recently shrouded the Chinese capital in smog.

Added to this are some supply concerns, after Saudi Arabia and Iraq reduced their output last month.

"The physical market is tightening," said Amrita Sen, the chief oil analyst at Energy Aspects. The spectre of geopolitical instability is lurking, too, as the Middle East assumed its familiar mantle as one of the world's prime hot spots.

Sectarian tensions in Iraq are threatening to derail production there, said Ms Sen, while the long-standing conflict between Baghdad and the Kurdish Regional Government continues.

Last year, the dispute over control of natural resources led to a temporary shut-in of Kurdish oil.

In Libya, unrest in the oil regions led to a slight decline in production. More worryingly, the Islamist militants' attack on a gas installation in Algeria last month raised concerns that Libya's remote and scantly protected oilfields could also soon be subject to terrorist activity.

All this weakens the outlook for Brent, the benchmark for the oil market outside the US, making further gains difficult.

"It will be tricky to maintain the direction for Brent," said Ms Sen.

fneuhof@thenational.ae