Oil and gas geopolitics: no shelter from the storm

From Asia Times

There could be widespread ramifications from US energy independence and looming US sanctions on Iran and Russia; states in Central Asia could be hit hard, as well as serious possible impacts on global oil production and the West

Russia and Saudi Arabia are in deep debate on whether to raise OPEC and non-OPEC oil production by 1 million barrels a day to offset the drastic plunge in Venezuela's production plus possible shortfalls when new US sanctions on Iran kick in in November.

The problem is that even a production raise would not be enough, according to Credit Suisse; only 500,000 barrels a day would be added to the global market.

Oil has spiked as high as $80 a barrel -- unheard of since 2014. A production spike could certainly halt the trend. At the same time, key supply players would rather keep crude futures at $70-$80 a barrel. But the price could even hit $100 before the end of the year, depending on the impact that US sanctions have.

Persian Gulf traders told Asia Times the current oil price would be "much higher today if the Gulf States played their usual role at OPEC and cut back production" -- to 10% or 15% or 20% of OPEC supply. According to an Abu Dhabi trader, "present OPEC cutbacks only target 1.8 million barrels a day, which is ridiculous, and indicates that the US is still pressuring to hold down the price."

A Saudi-Russia deal could certainly turn the tables.

And then there's the further issue of depleting OPEC supplies. There's a consensus among traders that, "the depletion that has to be replaced is about 8% of total supply, which comes out to approximately 8 million barrels a day per year. Most of this has been made up by pre-2014 drilling but in the next four years will fall short very considerably as drilling has collapsed 50%."

So, uncertainty seems to be the rule. To add to this, Societe Generale has forecast that US sanctions might remove as much as 500,000 barrels a day of Iranian crude from the global market.

And that leads us to the real big story for the foreseeable future, as Asia Times cross-referenced analyses from Persian Gulf traders with diplomats in the European Union; beyond technical issues, the point is how oil and energy markets are hostage to geopolitical pressure.

The US is in a relatively comfortable position. US oil production has reached 10.7 million barrels per day -- enough for domestic needs. And shale oil production is expected to rise to a record 7.18 million barrels a day next month, according to the US Energy Information Administration.

The US imports only 3.7 million barrels a day -- three million of them from Canada. As traders in the Persian Gulf confirmed, the US "imports heavy and exports light oil. In three years the country will be essentially totally independent."

Sanctions or bust

Once again, the heart of the matter concerns the petrodollar. After the Trump administration's unilateral pull-out from the Iran nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), European Union diplomats in Brussels, off the record, and still in shock, admit that they blundered by not "configuring the eurozone as distinct and separate to the dollar hegemony." Now they may be made to pay the price of their impotence via their "outlawed" trade with Iran.

The EU -- at least rhetorically -- now wants to pay for Iranian oil in euros. Add to it the Trump administration's ultimatum to Chancellor Merkel: give up the Nord Stream II gas pipeline from Russia or we will slap you with extra tariffs on steel and aluminum -- to gauge the incandescence of current US-EU relations.

This Deutsche Bank Research report has the merit of highlighting the advantages of Nord Stream 2. It hits one of the nerves, when it stresses that, "Russian gas flows through the Ukraine look set to continue following the expiry of the old contracts in 2019." That "may foster acceptance of Nord Stream 2."

But that does not tell the whole story.

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