x Abu Dhabi, UAETuesday 25 July 2017

Straitened circumstances risks oil

The recent sabre-rattling by Iran over the Strait of Hormuz has not, so far, affected oil and gas supplies or prices - but that is not certain to remain the case. Here, Badr Jafar, the president of Crescent Petroleum, discusses the issues.

The recent sabre-rattling by Iran over the Strait of Hormuz following the imposition of sanctions because of its nuclear programme have not, so far, affected oil and gas supplies - but that is not certain to remain the case. Here, Badr Jafar, the president of Crescent Petroleum, discusses the issues.

q&a

q What are the consequences of the tensions surrounding Iran's refusal to abandon its nuclear programme and the spectre of interruptions to oil exports through the Strait of Hormuz?

a Interestingly, oil prices didn't move much more than usual on the days in December of last year and January of this year when the rhetoric over closing the Strait has been highest. That suggests the market does not think such a closure is imminent and highly probable.

On the other hand, I would say that since the beginning of 2011 political tensions from the Arab Spring and the more recent issues with Iran over the Strait of Hormuz there has been a big political risk premium on oil prices with an associated marked increase in price volatility.

Clearly, this means Iran's words contribute to a broader sense of instability that is having a sizeable impact on the world economy even without any supply interruptions! The whole affair reiterates the need for investment in pipelines to diversify supplies around the Strait. This will ... require greater regional oil pipeline interconnections to create a more robust export infrastructure.

q What is your assessment of the capabilities of other producers to fill in the gaps of any shortfalls caused by a reduction in Iranian oil supplies?

a Well, if we are considering only the short term here, Iran currently produces something like 3.5 to 4 million barrels per day of oil, I think the IEA [International Energy Agency] estimates that global effective spare capacity, mostly located in Saudi Arabia, Kuwait and the UAE, is 3 million to 4 million barrels per day at the moment.

So if there were a total cessation of Iranian production then I think it would be very hard for other suppliers to fill the gap. If all we are talking about is the EU embargoing Iran or Iran choosing not to supply Europe but Iranian production itself not changing then I don't think that will make much difference at all.

After a few months localised disruption the global oil market would probably adjust and new buyers and sellers would be found.

q What is your outlook for gas and oil prices this year? What are the biggest risks?

a The Strait of Hormuz issue is without doubt the biggest known unknown for this year for both oil and gas prices. A long, total closure would be a different matter and I would imagine oil prices of US$200 plus per barrel could be possible.

The global economy, particularly China, is critical. Growth in Europe is already reversing, the US is doing OK but is still not strong, there are signs of a bursting property bubble in China and a marked deceleration in that economy's growth rate. So extreme risks in both directions point to continued high volatility, but as for my medium case?

I would say that recent Saudi pronouncements that the optimal price for oil is at $100 per barrel should be given a lot of weight. That the current oil price band we have seen over the last year, despite all of the momentous events, has held in that $100 to $120 range suggests that there is resilience in that range.