P H
Feb 06, 2017 14:11:09

Regional Oil & Gas: Keep a Vigilant Eye On Middle East Tensions

New sanctions that the US imposed against Iran are limited in scope and target specific individuals and entities. We believe the sanctions do not affect the nuclear deal that the six world powers and Iran agreed to last year. This therefore does not affect Iran’s oil production and exports at the moment. However, heightened tension and any threats of confrontation in the Strait of Hormuz could place a premium on crude oil prices. In addition, OPEC & non-OPEC’s production-cut deal may see historic high compliance levels. We maintain our OVERWEIGHT stance on the oil & gas sector.

  • New sanctions against Iran are limited in scope. The US added new sanctions on Iran’s weapons procurement network last Friday. The US Treasury Department published a list of 13 individuals and 12 entities that would face new restrictions for supporting the missile programme, having links to terrorism or providing support for Iran’s hard-line Islamic Revolutionary Guard Corps. The immediate trigger for these sanctions was Iran’s ballistic missile test last Sunday, that US believes that one day would be capable of carrying a nuclear warhead.
     
  • These new sanctions do not currently affect the nuclear deal that had been agreed to by Iran and the six world powers –UK, China, France, Germany, Russia and the US. This particular deal obliged Iran to curtail its nuclear weapons research in exchange for relief from the US and international sanctions. Under the UN resolution passed, the nuclear deal calls upon Iran not to undertake any activity related to ballistic missiles designed to be capable of delivering nuclear weapons, including launches using such ballistic missile technology.
     
  • Impact on oil markets. New sanctions that the US imposed against Iran are limited in scope in our view, and target specific individuals and entities. This therefore does not affect Iran’s current oil production and exports. However, heightened tension and any threats of confrontation in the Strait of Hormuz can put a premium on crude oil prices, as the strait represents one of the world’s most important oil chokepoints, with c.20% of the world’s crude oil passing through each day. Under current circumstances, we do not expect any significant actions to be taken at the moment. However, should political tension escalate from here, the possibility of significant actions by either side cannot be ruled out.
     
  • Historical deal to be followed by historical compliance rate. When the world doubted that the Organisation of Petroleum Exporting Countries (OPEC) deal was possible, we highlighted that it was in OPEC’s best interest to arrive at a deal to cut production. A historic OPEC and nonOPEC deal was made to cut 1.8mbpd in Dec 2016. When the world doubted OPEC’s compliance to a production cut (where historic compliance rate was 30%), we indicated that it would be OPEC’s credibility at stake and we would give it the benefit of doubt that the organisation would comply. We are now looking at a historic compliance rate of 60-80%. Over the next six months, production cuts would be officially announced on the 17thday of each month by OPEC.
     
  • Other supplies to enter. We are expecting around 300,000bpd of shale oil to enter in 2017, but this could be as high as 800,000bpd, depending on where crude oil prices are. Libya and Nigeria are exempt from the production cuts, therefore around 0.8mbpd could also be added to the supply over the next 12 months, should they be able to attain political stability. Hence, crude oil price is the major determining factor for US shale oil supply to enter the market, while politics is the major factor triggering supplies in Libya and Nigeria. (Kannika Siamwalla, CFA)
     
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