IS another oil shock just round the corner? If elements in the current global crude balance are viewed closely, the scenario is very much a possibility. The US Energy Information Administration reported last month that global supply disruptions reached 2.7 million barrels per day (bpd) in July. And analysts now say these outages have in fact risen since then. Geopolitical situation in the Middle East is one major influence on the global crude markets. Middle East accounted for 35 percent of global oil production in the first quarter of this year, according to data from the International Energy Agency. News pouring in from the entire region is disturbing. And this is impacting the crude sentiments. Libya's oil output has crashed to a near standstill over the past year as warlords and strikes have paralyzed the country, tightening the screws on global crude supply. Output has fallen from 1.4 million bpd to just 250,000 bpd after protesters shut oilfields and export ports. “We are currently witnessing the collapse of state in Libya, and the country is getting closer to local wars for oil revenues,” said the Swiss-based group Petromatrix. “Militia groups are behaving like terrorists, using control over oil as political leverage to extract concessions,” said Dr Elizabeth Stephens, head of political risk at insurers Jardine Lloyd Thompson. Port closures and strikes have compounded the damage but the deeper story is the disintegration of political authority. Production has also slumped in Iraq, Nigeria, Iran, Yemen and Syria itself, each for different reasons. This has cut daily global supply by 1.1 million bpd over the past year to 92 million, explaining why Brent crude prices have remained stubbornly high despite the slump in Europe and China's slowdown. Bank of America says the “global shortfall” in oil has reached 4 million bpd and leaves the world extremely vulnerable to a supply crunch if any missile strike in Syria goes wrong. The warning follows a disturbing report by Societe Generale's Michael Wittner, a former oil analyst for the US Central Intelligence Agency. Wittner predicts a rise in oil prices to $150 if the missile strikes lead to a regional spillover, citing retaliatory attacks by Iran on Iraqi oil supply lines as the chief risk. “Our big worry is Iraq,” he said. The country's northern pipeline from Kirkuk to Turkey has been attacked repeatedly over the past three months, cutting exports by 40 percent. Wittner added the danger is that the attacks will move south to the Basrah port complex that supplies 2 million bpd, this time orchestrated by Iranian proxies. “Iraq is close to civil war,” said Jardine's Dr Stephens. “Pipelines keep being blown up by Al Qaeda and other militants.” Iraq's output has slipped to 2.9m bpd from 3.2m bpd in April - far short of expected levels. Nigeria's output too has slumped to 1.9 million bpd from 2.5m bpd over the past year as bandits prey on supplies in the Delta region, while scheduled rig maintenance is to shave a further 500,000 bpd off output in the North Sea and Canada. United Nations sanctions against Iran over its nuclear enrichment program have drastically reduced Iranian oil exports by 1.2 million bpd, as per some estimates. And the ongoing crisis in Egypt and now Syria are destabilizing the crude markets – deeply – to say the least. Oil could briefly spike to $150 per barrel or more if Syria's supporters seek to punish the US and its allies for a military strike against it, more and analysts are now underlining.
For now, Washington seems reconciled to the proposition that the Assad regime was behind chemical attacks on Syrian citizens and that it has to be held accountable. But any adventure against Assad has the potential of shaking the entire oil-rich belt. "The concern is that an attack on Syria will reverberate through the region, increasing the spill over into other countries and possibly resulting in a larger supply disruption elsewhere," Wittner, said in his August 27 report. Simultaneous turbulent politics to the south in Egypt could also threaten global supply, as Egypt hangs in an unresolved state of emergency, fanning fears Suez Canal operations could be disrupted. A crucial trade route, the canal handles 800,000 barrels of crude a day and the Suez-Mediterranean Pipeline, which also runs through Syria, is a regional transport staple. US Republican Senator John McCain also seems worried at the prospect, ruling out extreme reactions like a closing of the Suez Canal but insisted that any reprisal over the Syrian government's use of poison gas would have economic impacts in the Middle East and beyond. "There are economic impacts if this conflict continues to spiral out beyond the borders of Syria. Those who think we can contain this within Syria, frankly that's just not what's happening in that part of the world." "If this Syrian action doesn't end after 48 hours (of bombing), it could hamper global growth. It could even have an impact on the Fed's taper calculus." CNBC's Bob Pisani opined. "While Syria isn't a big producer of oil, the potential for the conflict to escalate in the Middle East is likely to continue to push prices higher, unless we see attempts from the US to ease concerns about some form of military actions," Craig Erlam, market analyst with Alpari UK said in a note. Brent Crude surged to a six-month high last Wednesday, while the US benchmark held near its highest level since early 2011, as Washington geared up to attack Syria. And how deep developments in Syria were impacting the crude markets, also got evident from the fact that the upward march of crude markets got stalled, once the British parliament defeated a proposal by Prime Minister David Cameron that could have led to UK involvement in a military attack on Syria. Despite on track for the biggest monthly gain in a year, with Brent up more than 6 percent in August, it slipped below $115 a barrel on Friday as fears over supply disruptions in the Middle East eased, somewhat, after Britain said it will not join any military action against Syria. With the oil rich region literally on fire – crude sentiments are getting bullish with each passing moment. Efforts are already being made to stabilize the markets. US energy consultancy PIRA says, Saudi Arabia is all set to pump 10.5 million barrels a day of crude in the third quarter - a million bpd increment over the second quarter and - its highest quarterly level of production ever. But despite the opening of taps by Riyadh, global economy could be faced with strong headwinds in the coming days. Courtesy geopolitics, smooth sailing is getting difficult – with each passing day!
