Geopolitics to drive oil prices once again

I have picked up some news items from Oil & Energy Insider that support my hypothesis that US Shale output will continue to rise but some of the oil producing countries may become victim of commotion, anarchy and proxy wars. This will automatically reduce the supplies from these countries and there will be no pressure on OPEC to extend output cuts anymore.

Energy sector analysts are desperately awaits the outcome of OPEC’ meeting in Vienna scheduled for 25^th May. While the overwhelming expectation is that the cartel will agree on a six-month extension of the production cuts. However, now top OPEC officials are wondering if it will be enough. OPEC’s monthly report revised expected US shale growth sharply upwards, predicting output to increase 64 percent more than originally expected. That equates to projected growth from US shale of 950,000 bpd this year. OPEC fears that an extension will boost prices just enough to allow shale companies to lock in hedges once again, ensuring another wave of supply.

Tensions between Libya’s Presidential Council (PC) and the National Oil Corporation (NOC) are growing. The PC, which presently functions (that could change any day) as the head of state and military, and which is responsible for selecting members of the government, is ostensibly in control of investment decisions concerning Libyan oil. It was given this power via a resolution passed earlier this year. But the cracks in this set-up are already showing. The NOC is now accusing the PC of using the resolution to give German Wintershall a free pass in terms of compliance terms that it had agreed to with the NOC back in 2010. The NOC is now saying that the PC’s liberal stance on Wintershall is costing Libya $250 million because the dispute between the NOC and Wintershall has led to the shutdown of 160,000 bpd in production capacity. So, what does this mean for Libya? For the moment, production continues to rise. It’s now jumped to 780,000 bpd for the first time since 2014. And while elsewhere such a dispute might not rock any serious boats, in Libya this is the stuff of bloody changes in power. The NOC and PC are only hanging on to a modicum of control in the face of numerous militia factions that shift alliances with the wind. If the PC refuses to meet the NOC’s demand to revoke the resolution that gave it control over investment decisions, we could very easily see another shift in power in Libya. The NOC is bent on raising production a million bpd by the end of the year, and if it feels the PC is getting in its way, it may have the power to sideline it. The bottom line: The market responds in a knee-jerk fashion to any increase in production in Libya, but it’s important to keep in mind that Libya’s oil output on any given day is fragile at the very best.

For the first time in history, Tunisia has deployed armed forces to guard its oil and gas fields in the south, under threat from ongoing protests. Protests in the south have been going on for several years now, as the North African state tries to turn its economy around in the aftermath of the 2011 Arab Spring. But so far, planned government reforms have not been met with much enthusiasm. The south of the country still feels marginalized, and high unemployment—particularly among youth—and a perceived misdistribution of resource wealth are fanning some dangerous flames. Resource wealth, by regional comparison, is pretty low, but it’s enough to get the Tunisian youth up in arms. In 2013, Tunisia’s crude oil production hit a historic low of 60,000 bpd. By the end of 2016, it had fallen to 49,000 bpd. Right now, media puts production at 44,000 bpd, and if the youth is not appeased, even this paltry resource volume could be at risk.

Kenya’s first planned oil exports are also at risk. Residents of Kenya’s Turkana South have threatened to block the planned transportation of crude oil to Mombasa. Transportation of the oil from the Turkana fields is expected to start early next month, but locals are threatening to block it to buy time for more negotiations on revenue-sharing, job allocation and infrastructure deals. In mid-March, Kenya greenlighted a crude oil export agreement with Tullow Oil, Maersk International and Africa Oil, with pilot exports slated to start in June in a major milestone for the East African country, which was put on the oil map with a massive 2012 discovery. The companies have stored 70,000 barrels of crude oil, which will be used for part of the pilot program. Three companies announced that they will immediately begin transporting crude oil from the South Lokichar field in the prolific Turkana basin to the Kenyan Petroleum Refineries Limited (KPRL) at the port of Mombasa. From there, it will be exported to market in June—that is, unless protests get in the way. The South Lokichar field is being explored and developed by a joint venture between three companies. It is estimated that there are about a billion barrels of oil in the Lokichar area.