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The usual suspects

Familiar geopolitical risks will linger into the coming year, but won’t much affect a well-supplied oil market till the end of 2017

Continued production losses in some of the world's big oil-producing countries and the erosion of Saudi Arabia's spare-capacity cushion will persist in 2017, but neither will provide much support for the oil price. For now, the world market remains comfortably supplied, inventories are high and Opec is still pumping hard.

The big threats to oil supply in 2017 will come from repeat offenders: Venezuela, Nigeria, Libya and Iraq, where upheavals of various kinds have removed 2.4m barrels a day of oil supply from world markets - a situation that should persist for much of 2017. Saudi Arabia's spare capacity, another habitual source of comfort for edgy markets, has fallen to 1.1m b/d, according to the Energy Information Administration - or even less. We calculate the buffer to be just 0.5m b/d.

Venezuela's grim finances will keep undermining its oil industry in 2017. Crude-oil production fell to 2.2m b/d in 2016, its lowest level since 2003, and a further decline of around 300,000 b/d is likely in 2017. But the very real risk of a debt default could knock another 1m b/d off the country's total, with a freeze on 0.8m b/d of PDVSA's crude exports to the US - Venezuela's largest international market - a possibility and the state-owned oil company's overseas assets at risk as collateral for debt.

PDVSA just about kept on top of debt repayments in 2016, but has a good chance of defaulting in the first half of 2017, with $4.1bn due between March and May, forex reserves plummeting, China reluctant to cough up more loans to the present government and debt-swap negotiations faltering. Production in Nigeria will remain volatile in 2017 too, as the unpredictable Delta peace process rumbles on. Over 0.55m b/d were lost this summer and there is a reasonable chance of another 300,000 or even 0.5m b/d going the same way. For most of 2017, production is likely to bounce around the 1.3m-1.7m-b/d range, adding further uncertainty to an economy undermined by falling crude production, economic recession, declining local currency, fuel and power shortages, and falling foreign-exchange reserves.

The sustained return of disrupted barrels depends on a lasting deal between the government of Muhammadu Buhari and various militant groups. That, though, seems unlikely, given President Buhari's commitment to curbing spending and tackling corruption. In 2016, militant groups found themselves increasingly frustrated with the slow progress of peace talks and will probably keep griping in 2017.

Until summer 2016, Libyan output was hamstrung by militias fighting in the centre of the country - and the menace of Islamic State, which repeatedly struck at facilities in recent years. But the capture of energy infrastructure by one side started to lift output. In 2017, only peace and political resolution will bring significant production growth - but the ever-present threat of more disintegration will be a headwind. An attempted coup in October 2016 meant that a third government now claimed authority over the country. With the chasm of political disintegration beneath, an oil-output recovery relies on an act of gravity defiance. Expect more chaos.

Although Iraqi production reached new highs in 2016 and its exports followed suit, recent optimism about continued growth seems unfounded. As much as 0.9m b/d of supply could be at risk in 2017.

Islamic State's (IS) anticipated defeat in Mosul by the end of 2016 will have the effect of sending Iraqi IS members elsewhere in the country. That will create a new element of insurgency, likely to target energy infrastructure in the Kurdish region of Iraq and southern Iraq. Oil infrastructure will be at less risk during the Mosul campaign: one-off attacks in the largely Shia Basrah region of the south may provide temporary price support, but won't disrupt production. Still, southern output is likely to fall by 300,000 b/d in the second quarter for more mundane reasons: lack of investment and maintenance.

So 2017 will be rich with geopolitical strife, even hitting oil output. The direct impact on a well-supplied market, though, will be minimal.

That will change, over time - as under-investment in global production capacity in general starts to rebalance supply and demand towards the end of the year. Then, with the market looking more normal again, geopolitical events will be more keenly reflected in oil prices - especially if tension in the Gulf between Saudi Arabia and Iran increases and the perennial threat to oil flows through the Strait of Hormuz resurfaces.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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