Crude futures depend on global events
By Daniel Tyson
20:56, 4 January 2022
When OPEC+ members decided Tuesday to continue pumping 400,000 barrels of crude daily into the pipeline next month, it barely drew a yawn from traders and analysts. However, they are now pondering what will affect prices.
The broad answer lies in geopolitics.
While traders and analysts weren’t shocked by the cartel's business-as-usual decision, on Tuesday afternoon oil prices were up. February’s deliveries of West Texas Intermediate on the New York Mercantile Exchange were at $77.16, up 1.42% at 2 pm EDT (UTC-5). Sources said they could not predict how much world events would increase or decrease future prices.
“We expected OPEC+ members to stay the course, and they did,” Andrew Lipow, president of Lipow Oil Associates, told Capital.com.
Across the globe, events are occurring that’s going to influence the price of crude in the near future, from Latin America to Europe and Africa.
Besides the global fear of Omicron spreading and causing lockdowns, workers not commuting to the office and flights being grounded, the industry is closely watching geopolitical events unfold.
Of key interest to western nations is what’s happening in Russia.
Phil Flynn, senior market analyst at Price Future Group, has his eyes on the brewing conflict between Russia and Ukraine.
“We have to look at as we head towards the new year is geopolitical risk Russia and the Ukraine is still a big issue and could have a major impact on energy prices,” he told Capital.com.
This is a belief shared by Lipow.
The increased tension between the two former Soviet nations has caused a showdown between Russia and western nations. US and European officials informed Russia last month that if Russian President Vladimir Putin does take military action against Ukraine, the just-completed Nord Stream 2 pipeline and its money-making potential could be part of the retaliation. Nord Stream 2 is the second natural gas pipeline running from Russia to Germany through the Baltic Sea.
Meanwhile, Iran’s desire for nuclear weapons continues to affect oil prices. After rounds of talks broke down between the middle eastern country and the US.
On Tuesday, British Prime Minister Boris Johnson said time is running out for Tehran, which is stalling on reaching an agreement. “The diplomatic door is open, but time is running out to reach an agreement,” he said.
“Of course, we have to look at the Iran nuclear deal and see if there’s any ramifications if that deal falls apart,” said Flynn.
Meanwhile, the US is weighing new sanctions against Iran’s oil sales to China as a way to pressure Tehran into reviving the Joint Comprehensive Plan of Action (JCPOA).
The JCPOA is the 2014 agreement to curb Iran’s nuclear programme in exchange for lifting some sanctions against the country. Once, Iran was known for its oil riches, but for the last couple of decades, the country has been under international sanctions for its nuclear programme.
Two oil producing countries in the region are being closely watched by the oil industry.
The first is Venezuela. Once an oil rich nation, before boycotts and strict US sanctions over its leadership, its economy has collapsed. Boycotts and sanctions created a prime opportunity for Russia, Iran and China to strengthen their influence in Latin America, once a region dominated by the US.
Under Venezuelan President Nicolas Maduro’s leadership, Russia and China have gained a foothold by providing support for the embattled regime. Last week, Maduro announced he will visit Iran “very soon.”
Since last year, Maduro’s government has received vital equipment for its oil industry from Iran, which in return has received crude and other primary resources from the South American country. Iran has been crucial for Venezuela's rising oil production in 2021.
This aid has been mutual to the two oil rich nations. In November, PDVSA – Venezuela’s national oil company – reported, much to the oil industry’s surprise, a significant increase in crude production.
Data shows the country pumped out an average of 824,000 barrels daily in that month, a 9% increase compared to October and nearly double the 434,000 barrels per day in November 2021, according to OPEC data.
Lipow said the increase is most likely headed to China, if the numbers are accurate.
These events do not bode well for the Biden administration in the US, which has said few words on Venezuela.
“We also have to look at Venezuela and whether the Biden administration will do anything to stop them from cheating on sanctions,” Flynn said.
In recent weeks, Ecuador experienced a major disruption when its state-owned SOTE oil pipeline stopped pumping due to erosion from weather conditions in the country’s Amazon region. Operations in oil fields are expected to resume shortly.
Reportedly, the country’s output plummeted to 90,358 barrels on 29 December, down from 485,000 barrels per day before the crisis began forcing the government to declare force majeure. Erosion, the county’s oil minister said, is naturally occurring along the Coca River, located in the eastern part of Ecuador.
Insiders question OPEC+ members’ ability to actually produce 400,000 additional barrels a day, given infrastructure issues and disruptors around the world.
Oil rich nation Libya’s oil production was slashed to 200,000 barrels a day after pipelines along the nation’s largest fields were damaged by militias in December. Normally, the field produces 350,000 barrels daily.
“This becomes a bigger issue because OPEC is predicting the deficit in the next two quarters and this should be very supportive for prices especially if they can’t get this back online soon,” Flynn explained.
In Nigeria, the oil production infrastructure is outdated and often offline for repairs.