The last 30 minutes of trading breathed some life into an otherwise uneventful trading session yesterday. The belief in a positive trade deal continues unabated and all that was needed for a good 60 cents/bbl rally towards the close was some warm words from the US President. Donald Trump said that the US was in the “final throes” in reaching an agreement with China. No surprise US equities climbed to yet another record high taking oil with them. WTI jumped 40 cents/bbl to $58.41/bbl and Brent 62 cents/bbl to $64.27/bbl.
As the US will be busy getting the Thanksgiving turkey after tonight’s settlement, we can expect some hectic action when the EIA releases its latest weekly data on US oil inventories. Based on the figures from the API oil bulls could be left utterly disappointed. Crude stocks are seen to have risen by 3.6 million bbls against a Reuters forecast draw of 418,000 bbls. The 4.4 million bbls build in distillate inventories is equally depressing as the poll shows an increase of only 1.2 million bbls. Slight consolation came from a 665,000 bbls draw in gasoline stocks against an expected build of 750,000 bbls.
Outright prices are resilient supported by equities and the two main crude oil futures contracts are in backwardation – Brent much more than WTI. There has, however, been a rather spectacular collapse in Urals differentials. The premium it commanded over Brent both in Northwest Europe and in the Mediterranean two weeks ago is nowhere to be seen now as dismal crack spreads are dampening refinery demand. The discount to the European benchmark is currently below $3/bbl in NWE and below $1.50/bbl in the Med.
MENA risk The Middle East and North Africa have always been considered a barrel filled with gunpowder where a spark would be enough to send the region up in flames. It is especially true for the former since Donald Trump was elected President and the US pulled out of the Iranian nuclear agreement. As for North Africa after the Arab Spring democracy, as we know it, has not been implemented and the political vacuum created by the removals of the dictators of the past have been filled with rival factions vying for power. Every now and again periods of relative calm are installed but history shows that these are not to be taken for granted. As the region is the home of oil producing countries the escalation of tension always catches the eye of oil market players. In the recent past a flare up in dissent has become tangible again, namely in Iraq, Iran and Algeria.
Iraq: protests in Iraq are not uncommon but the recent bout of violence seems more serious than previous ones. The bottom line is that people are fed up with the political elite. They do not protest against the government or a political party, but they are calling for a change of the political system. They accuse those in power by appointing government officials based on religious or ethnic background and not on merits. They also want to hold the current Prime Minister, Adel Abdel Mahdi responsible for failing to honour his campaign promise to fight corruption and narrow the gap between the elite and the ordinary people. The unrest has claimed the lives of more than 300 people. The country’s top Shia cleric, Grand Ayatollah Ali Sistani gave his support to the protest. The end of the unrest is not in sight in a country that produces more than 4.6 mbpd of oil.
Iran: in a way what is happening in the Persian Gulf OPEC member is not unexpected and could have happened earlier. The country is under significant economic strain ever since the US administration unilaterally left the nuclear agreement and imposed sanction on Iran. This year the economy is forecast to contract 4.5%. The country’s oil production has dived from 3.8 mbpd to 2.1 mbpd whilst the main source of foreign revenue, oil exports, has dwindled from 2.8 mbpd to probably below 500,000 bpd. In the middle of the month, bowing to economic hardship, the government decided to raise domestic petrol prices by 50%. The step triggered anger as cheap petrol (it cost less than 10 cents/litre before the increase) is considered the birth rights of Iranians. After protests started banks and other buildings were set ablaze. Demonstrators and protesters clashed, with schools and universities being closed. According to Amnesty International more than 100 people died.
Algeria: the latest round of protests started in February this year when the country’s ex-President, Abdelaziz Bouteflika announced that he would run for office for the fifth time. These protests eventually led to his resignation two months later. His resignation, however, was far from enough. As in many African countries when political vacuum is created the army usually moves fast to fill this void. In Algeria the former ally of the ex-President, General Gaid Salah tried to grab power. Although he was planning to keep elections next month his attempt is rebuked by the crowd. Protesters, mainly the younger generation, are demanding government reforms and effective fight against corruption.
Although authorities in Algiers closed metro and train lines to the capital rebels against the current regime have taken to the streets every Friday for more than nine months. The current crisis shows no sign of easing in the country with oil output of 1 mbpd. Although oil production has not been affected lately in the region (the Iran’s misfortune started more than a year ago) these events, together with the attacks on Saudi oil installation in the middle of September, serve us with a reminder that the simmering tension in the most important oil producing region in the world can boil over any time.