Two apparently unrelated pieces of news captured the fall and rise of crude in the past one year. First, the Standard & Poor’s cut the top-notch credit rating of a debt-ridden US on August 6, highlighting persistent concerns about collateral damages to the global economy and a resultant slump in crude demand. Crude shed 6.8% during the month to an average of $100.46 per barrel, while brent dropped 5.48 % to an average of $110.08 a barrel.
Second, Iran successfully test-fired three long-range missiles near the Strait of Hormuz on Monday after warning on Dec. 27 that it would shut the key shipping route through which 40% of the world?s oil is shipped if sanctions are imposed on its crude exports. US crude for the February delivery rose $4.13 to $102.96 a barrel on Jan. 3, the highest close since May 10, while Brent prices gained nearly $5 to $112.39.
While these don’t adequately suggest oil will boil into a protracted global crisis, it would be interesting to watch how other oil-producing nations will respond to the rare crisis.
In December, the Organisation of the Petroleum Exporting Countries (Opec) capped a six-month-old feud over supplies and agreed to a new production target of 30 million barrels daily, roughly in line with the current production. Although Opec did not discuss individual national quotas, it capped, in theory, output for all members for the first half of 2012 at levels that would allow a marginal rebuilding of lean global inventories. In June, Saudi Arabia’s proposal to increase the output to curb the soaring prices and offset a supply squeeze in crisis-ridden Libya was rebuffed by Iran, Algeria and Venezuela.
With sanctions against Iran’s crude exports mounting, new fears about supplies emerge. The European Union is moving closer to stopping oil imports from Iran over the Islamic republic’s nuclear programme; China says it may cut purchases from Iran for a second month, as the two countries are split over payment terms; Japan is weighing a reduction in oil imports from Iran in an apparent bid to woo the US.
The EU accounts for 18% of Iran?s crude oil supplies, while China and India meet one-tenth of their crude requirement through imports from Iran. Japan buys around 11% of its oil from Iran. The Islamic republic has around 137 billion barrels of proven oil reserves, or close to 10% of the world total. The EU sanctions alone have the potential to send Brent crude soaring to $125 a barrel, according to Societe Generale SA.
And all the while, the Saudis have kept everyone, including the Opec, guessing about their future course.
All eyes are on the restoration of supplies from Libya after the political crisis there, but a larger question is if the biggest supplier Saudi Arabia will pitch in to fill the gap, and to what extent.
Reuters cited a unnamed source to suggest the Saudis, the best friends of the US in the Arab world, may come forward to ease a supply crunch, but doing so may bring them in confrontation with other Opec members who had agreed on the supply target in December.
Saudis would require about 600,000 barrels a day of replacement supply for the EU to offset the Iran factor, potentially depleting the country?s spare capacity. A resurgent Libya holds some promise, but its one million barrels per day will hardly compensate for Iran?s 2.6 million bpd.
For Iran, it’s the worst period of export sanctions, as the global economy still struggles to recuperate from the crisis and the demand for crude may not be as robust as it would have been three years ago. The crisis offers a unique opportunity to big buyers such as China and India, which are non-committal so far over a supply halt, to bargain hard for lower prices.