Oil prices are unlikely to sustain any significant gains this year despite escalating tensions in the Middle East, according to the chief of one of the world’s leading providers of information to the commodities and energy markets.
With the attack on Saudi Arabia’s Abqaiq oil facilities in September or the US drone strike that killed Iran's top General Qassem Suleimani in Baghdad this month “the markets did react but the reaction was short-lived because the realisation is fairly quick that there is supply which can come,” said Martin Fraenkel, S&P Global Platts president.
"I don't think markets are complacent. They are realistic about the nature of the disruption we have seen so far," he told The National in Davos, where he is attending the World Economic Forum annual meeting. "The obvious key reason has been the massive growth in US production of crude and that continues to grow, albeit at a slower rate. If supply is disrupted for short periods of time like we've seen then there are either stocks or other supply available to meet it."
Producers both within and outside of Opec also have some spare capacity to meet any shortfall.
“The vulnerability of oil markets to supply disruptions really depends significantly on what the overall supply and demand context is,” Mr Fraenkel said. “We see stocks of oil around the world as being reasonable and some of the key consuming countries like China have restocked over the last few years.”
Markets are looking past supply-side risks. The clearest example of that is benchmark Brent crude increasing past $66 a barrel following the disruption in Libya which took more than a million barrels a day from the market temporarily, reducing the Opec producer's output to its lowest since 2011. On Tuesday Brent fell to $64.84 a barrel as global supplies eased concerns and Europe said it is considering dispatching a military force to Libya.
In December, S&P Global Platts projected Brent to break above $65 a barrel between March and May before falling back to the low $60s a barrel by year-end. This is based on forecasts of global oil demand growth rising to 1.26 million
barrels per day this year, up from 0.95m bpd last year.
“We see supply of oil as being pretty reasonable relative to demand. We see 2020 as being a broadly balanced market,” said Mr Fraenkel, who before joining S&P Global Platts had been with futures and options exchange owner CME Group.
Things could change, he said, if there was prolonged disruption, which fundamentally altered the supply balances in one of the bigger producers.
The September attack on Saudi Arabia "was probably the most serious geopolitical incident we have seen," he said. "In the past, that would have been massive for months and years but actually the Saudis were able to reinstate production pretty quickly. The market sentiment was that this is a one off rather than something long-term.”
More broadly, compared to 20 years ago there is less dependency on Middle Eastern oil relative to the proportion of the overall oil supply and demand balance, Mr Fraenkel said.
This could mean that the kind of price shocks witnessed in the past may not be as much of a factor today. World Economic Forum research last week showed that the fear of an oil price shock and its impact on the global economy is not as pronounced among leading executives as it was several years ago.
“Not always but generally, the shocks come from the Middle East. It’s not just the Middle East but it was obviously the most geopolitically charged part of the global energy markets and was a very significant part of production," he said. "Even a few years ago we had very tight supply and demand imbalance. At the moment that’s not the case. Even if we were to have a sustained supply shock which took global crude prices high, for example, we are all pretty confident that in the US the ability to produce more shale oil at higher prices is there.”
The US Energy Information Administration expects output to reach record levels this year and next. Rising production in the US could limit price increases, said Mr Fraenkel, who was also a senior commodities trader at several investment banks.
“What happened when we had the disruption in Saudi … crude prices rallied towards $70 a barrel … all the producers in the Permian basin and around, they’re all hedging and selling forward there and capping the price rise … they can produce very economically for the next year to eighteen months based on those hedges. We see quite a lot of outstanding options which are struck at $70 a barrel and that’s seems to us a natural resistance point.”
On Monday, the International Monetary Fund said it forecasts oil prices at $58 a barrel but expects this figure to be higher in its October forecast later this year.
“Clearly we have seen a rise in geopolitical tensions in the Middle East. We still have to see how far this goes. If you look at the response of markets and if you look at oil prices the reaction has been fairly muted at this point,” Gita Gopinath, the IMF’s chief economist said at the World Economic Forum in Davos. “We’ve seen some increase of about $3-$4 [a barrel] in the price of oil but nothing very large. Again it’s going to depend on what shape the geopolitical conflict takes.”