Related Articles
In depth Partner Insight
Forward article link
Share PDF with colleagues

The volatile 10

As the oil market regains balance, risk will affect the price. Here's where to watch


Unpredictable leader?

Global risk now emanates directly from the Oval Office and—on everything from North Korea to Nafta—Donald Trump's Twitter account. For the oil market, the president is broadly bullish. US tax cuts may feed into higher demand; Trump's dislike of the Iran deal and stance on Venezuela may bring sanctions; and an implicit soft-dollar policy could support oil prices. His "American first" programme has not caused the drop in global trade some feared. The main bearish risk from the US comes from the Fed's planned interest-rate rises this year and the impact on the global economy. If Democrats win bigly in November's midterm elections, Trump will be stymied and the Russia investigation a threat to his tenure.


Supply shock?

Oil production was 3.4m b/d in 1998. It ended 2017 at 1.6m b/d and could drop beneath 1.3m b/d by mid-2018. The US is considering sanctions on Venezuela's oil sector. Bond payments are due—and the money is running out. President Maduro is digging in, but civil order is disintegrating. Venezuela is the stand-out political risk for the global oil market in 2018.


Delta peace?

Oil output, now 1.7m b/d, should keep rising as new offshore production comes on stream. But political progress on new upstream legislation remains slow. Relative peace in recent months in the Niger Delta has brought some optimism—but militant groups including the Niger Delta Avengers are still threatening to attack infrastructure. Their last campaign, in 2016, cut output to under 1.3m b/d. The approach of presidential elections in February 2019 will hang over negotiations in the Delta.


Supply risk?

Oil output has recovered to around 1m b/d after hitting lows of less than 300,000 b/d in mid-2016. State company NOC hopes to pump 1.3m b/d in 2018. But Libya is divided between two governments; militias remain at large; and Islamic State is regaining a foothold in the country. Oil assets in the crucial Sirte Basin remain targets for attack from both terrorists and opponents of Khalifa Hafter, the eastern-backed military leader with ambitions to rule the country. Elections are planned for 2018 and may spark more violence.

Saudi Arabia

What next?

The kingdom, under de facto policymaker Mohammed bin Salman, is undergoing a shake-up. The planned Aramco IPO, energy and subsidy reform, a loosening of social rules (cinemas, women driving): the scale and pace of change breaks many assumptions about Saudi Arabia. Yet all is not well. The rift with Iran is deepening. The Yemen war and spat with Qatar grind on, destroying GCC unity. The Houthi missile attack on Riyadh airport in December 2017 came on the same weekend that Saudi authorities rounded up dozens of wealthy princes in a corruption purge. Saudi policy, less predictable than ever, is a key geopolitical risk in 2018.


More oil?

The federal army has dislodged Islamic State (IS) from northern Iraq. But the fallout from the Kurdish independence referendum in September 2017 has cut exports from the north by about 250,000 b/d. A deal between Erbil and Baghdad could restore these flows, and Iraq is also seeking to export some northern oil to Iran. In the south, oil-output capacity continues to increase, and now sits at almost 5m b/d—about 500,000 b/d more than its Opec-capped output. The surprise from Iraq may be more oil in 2018, not less—though regional analysts also caution that while IS may be gone from Mosul the underlying causes of its emergence linger on.


New sanctions?

Oil production has reached about 3.8m b/d and Iran's oil minister Bijan Namdar Zanganeh says upstream work, especially at West Karun fields, gives the country another 100,000 b/d of supply ready as soon as Opec's cuts end. But the prospect of new US sanctions hangs over Iran's oil sector. A collapse of the nuclear deal, if the US pulls out, could destroy the confidence of foreign investors and kill off Iran's upstream opening. It wouldn't remove 1m b/d, as sanctions did before their relief in 2016, but analysts say US measures could curtail up to 400,000 b/d. Protests in January were quelled but revealed popular discontent with the government—a toxic backdrop for the regime should new sanctions be erected in 2018.


Spoiler alert:

President Putin won re-election this month. Russian adventurism in the near-abroad and the Middle East will continue. Moscow's war in Syria has been a success, as has the budding energy relationship with Saudi Arabia. For energy markets in 2018, Russia may spring two bearish surprises. In Europe, the arrival of more American LNG will eventually prompt Gazprom to protect its market with cheaper supplies. In oil, Russia's pact with Opec will be reviewed in June. Credit Suisse reckons 640,000 b/d of capacity awaits activation once the cuts end.

South China Sea

Stand-off looming?

China's ambitions in the South China Sea are leading to a confrontation with America that could imperil the activities of the oil and gas industry in the region if the dispute comes to a head. In 2017, China continued to defy international law by adding to its military infrastructure within the arbitrarily claimed Nine Dash Line maritime zone. A provoked US has boosted military support for Vietnam, which is exploring for oil in the contested Spratly Islands.

North Korea

War or peace?

It has no oil or gas to speak of and consumes little. But North Korea's nuclear showdown with the US threatens to transcend all other geopolitical risks in 2018. The sabre-rattling has eased in recent months, but Donald Trump has supposedly considered a tactical strike against North Korea. The risk of a conflict was one reason the Bulletin of the Atomic Scientists recently advanced its Doomsday Clock, a measure of how close the world is to catastrophe (midnight), to 11.58pm. (Not everyone takes the clock so seriously.) Aside from the colossal death toll, nuclear war would be a major macroeconomic shock.

This article is part of an in-depth series on Geopolitics. Next article is: Saudi options in Yemen exhausted

Also in this section
Iran backs Biden into a corner
24 November 2020
Rejoining the nuclear deal might be easier said than done
Letter from Norway: Tax stimulus medicine gets to work
23 November 2020
New legislation aids the country in reaching peak hydrocarbon production. But increased interest in renewables still poses stranded resources risk
PE Live: Safeguarding Mexican investment
16 November 2020
The suspension of licensing rounds may have disappointed the private sector. But international treaties offer crucial protection against further unwinding of the country’s energy reforms