As markets rise and fall, they also learn and adapt. The oil-price rally that began after tensions flared between the U.S., Iran and Iraq fizzled quickly. And some investors are skeptical such rallies can last after other recent geopolitical dust-ups failed to sustain higher prices over time, reports Sarah Toy.
Crude futures jumped as much as 4.9% on Friday, Jan. 3, after President Trump ordered a strike in Baghdad that killed Iranian Maj. Gen. Qassem Soleimani. But by last Tuesday, futures were falling. Brent, the global gauge of prices, fell 0.9% to $68.27 a barrel.
This morning in London, Brent was trading below $65.
The Trump administration says it will place new sanctions on Iran. Iraq is facing threats of U.S. sanctions too, after its parliament voted to expel the approximately 5,300 U.S. troops in the country.
The administration warned Iraq that it risks losing access to its account at the Federal Reserve Bank of New York, where it houses revenue from international oil sales. The ban would likely create a cash crunch for Iraq’s financial system, write Ian Talley in Washington and Isabel Coles in Beirut.
Producers across the Middle East remain more ill at ease than oil traders in Europe and the U.S. Officials around the Persian Gulf fear their oil facilities could get caught in any future crossfire between Washington and Tehran, as Benoit Faucon observes in our Reporter’s Notebook below.
— John Simons, London Energy Editor
What We’re Watching
• China’s top negotiator will travel to Washington on Monday to sign a phase-one trade deal with the U.S.
• OPEC releases its monthly oil market report on Wednesday.
• The International Energy Agency publishes its monthly oil market report on Thursday.
• The European gas conference takes place in Vienna Jan. 27-29. Speakers include Gazprom’s Chairman Viktor Zubkow and Patrick Dugas, the vice president of LNG trading for France’s Total.
• The U.S. Energy Information Administration releases its annual energy outlook this month.
Oil prices edged down on Monday, after a turbulent start to the year; last week oil experienced its biggest weekly fall since July as U.S.-Iranian tensions calmed.
Brent was trading down 0.9% at $64.92 a barrel on London’s Intercontinental Exchange. WTI futures were down 0.05% at $59.02 a barrel on the New York Mercantile Exchange.
U.S. and Iran Back Away From Open Conflict
President Trump moved Wednesday to de-escalate hostilities with Iran, signaling no new U.S. military strikes after Iran fired missiles on Iraqi bases housing American and allied military forces. The attack, which resulted in no casualties, was in response to the U.S. killing Maj. Gen. Qassem Soleimani, a top Iranian military commander.
Following Iran’s military response, Mr. Trump said the U.S. would immediately impose more economic sanctions against Iran, though details weren’t provided, write Alex Leary, Nancy A. Youssef, Aresu Eqbali and Sune Engel Rasmussen.
The Trump administration’s sanctions on Iran, imposed as the U.S. withdrew from the 2015 Iran nuclear accord, have crippled Iran’s economy by hitting most of its main revenue sources including oil. Iran is being rocked by internal protests partly due to the country’s deteriorating economic situation.
Soleimani Killing Raises Fears of Reprisals on Oil Infrastructure
Crude prices rose last week after a U.S. airstrike killed a high-ranking Iranian military leader, stoking traders’ fears of retaliatory attacks on Middle Eastern energy infrastructure, write David Hodari and Ryan Dezember. Although the U.S. and Iran appear to be standing down from further hostilities, some investors anticipate more trouble for oil in the region.
Roughly a third of the world’s shipped oil passes through the Strait of Hormuz, where tankers have been attacked and seized over the past year as tensions escalated between Iran and the West.
U.S.-Iran Tensions Threaten Iraq’s Oil Success
Iraq’s ambition to rival Saudi Arabia for regional oil dominance is being challenged by the conflict between the U.S. and Iran, report Benoit Faucon and Sarah McFarlane.
The Iraqi parliament voted last week to expel American forces after the U.S. killed a top Iranian military commander on Iraqi soil. In response, Mr. Trump threatened Iraq, the second-largest oil producer in the Organization of the Petroleum Exporting Countries, with sanctions and a bill for billions of dollars. Most recently, the State Department warned the U.S. could shut down Iraq’s access to the country’s central bank account held at the Federal Reserve Bank of New York.
Aramco Adds to Record IPO After Selling Additional Shares
Saudi Aramco said it received an additional $3.8 billion from its record initial public offering as it sold more shares to meet demand from investors, boosting Crown Prince Mohammed bin Salman’s war chest to reshape the country’s oil-dependent economy.
Aramco’s IPO is now worth $29.4 billion, writes the Journal’s Rory Jones. The previous record holder, Chinese online commerce company Alibaba Group Holding Ltd., had raised $25 billion in 2014.
Someone Has to Pay the Tab for U.S. Shale’s Drilling Bonanza
The bill is coming due for the shale industry’s price war with OPEC, reports the Journal’s Ryan Dezember.
North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years, starting with more than $40 billion in 2020, according to Moody’s Investors Service. It’s unclear how companies will repay it all. Shareholders and private-equity investors have been burned, banks are in retreat and bond markets have shown little indication that they are open to any but the oil patch’s most attractive borrowers.
Trump Moves to Expedite Energy Projects
President Trump proposed an overhaul of the National Environmental Policy Act that would limit environmental reviews and speed up the approval process for infrastructure projects such as highways and energy pipelines, writes Timothy Puko.
Business groups including energy companies hailed the proposal, but environmentalists said thorough reviews of infrastructure projects are more important as climate change poses mounting threats.
Apache and France’s Total Find Oil in South America
Apache and France’s Total have found significant deposits of oil off the coast of Suriname, the companies said. The discovery is fueling investors’ excitement about what could be the second big recent discovery in the region after Exxon Mobil’s major strike in offshore Guyana, write Christopher M. Matthews and Micah Maidenberg.
• Is nuclear power worth the risk? (The New Yorker)
• Energy pipeline operators and oil giants feature prominently among Barron’s best income investments for 2020. (Barron’s)
• Technological advances made a billion-dollar solar plant obsolete before it went online. (Bloomberg)
• Major integrated oil firms and state-owned oil companies are split on their approach to the energy transition. (Petroleum Economist)
Big Number: 92%
That’s how much of the Iraqi national budget comes from oil revenues. Over the past two decades, the country has more than doubled its oil production, despite a U.S.-led invasion in 2003 and Islamic State’s takeover of large parts of the country in 2014.
Reporter’s Notebook: Gulf Tensions Fuel Oil Pullback
The Journal’s Benoit Faucon attended the Gulf Intelligence UAE Energy Forum in Abu Dhabi last week and writes about the mood among oil executives and regional energy officials as worries over a Middle East war subsided.
By last Wednesday, officials at an energy conference the United Arab Emirates city-state of Abu Dhabi appeared unfazed. Days earlier, Iran had fired more than a dozen ballistic missiles at U.S. forces in Iraq and threatened to attack the U.A.E.—a key American ally—in response to the killing of Iranian commander Qassem Soleimani.
Emirati energy minister Suhail al-Mazrouei echoed the calm sentiment in front of an audience at New York University’s local campus. “We are not forecasting any shortage of (oil) supply unless there is a catastrophic escalation, which we don’t see,” he said.
Tensions seem to have died down, but privately Mr. Mazrouei told contacts that he was worried Iran might retaliate against the Americans by striking his country’s oil infrastructure, according to a person familiar with the matter.
He was not alone. U.S. companies have officially pulled American staffers from Iraq. Many of the oil executives at the conference said they were discreetly taking similar precautions. British oil giant BP has reduced its foreign staffing in Iraq’s Kirkuk province, said a person familiar with the matter. On Dec. 27, a rocket attack by an Iranian-backed militia that killed a U.S. contractor in Kirkuk triggered the most recent flare up.
Total has also pulled some Western expatriates from its Baghdad office, an attendee said. The French oil major fears Lebanon, where it operates fuel distribution and is planning to drill soon, could be targeted next, that person said.
BP and Total declined to comment.
Mr. Mazrouei warned that any conflict would not just hurt the region. In 2008, fear of imminent war in the Persian Gulf lifted oil prices to around $137 per barrel, contributing to a global recession. “The economy cannot sustain another $100 a barrel,” Mr. Mazrouei told conference attendees in a speech.
Oil Markets Too Relaxed About Middle East Tensions, Analyst Says
Robin Mills, chief executive of Dubai-based consulting firm Qamar Energy, is a geologist by training who specializes in geopolitics and business development in the Middle East. Mr. Mills views the current lull in hostilities between Iran and the West as temporary. He spoke to the Journal’s Neanda Salvaterra about what might come next. Edited excerpts:
Q: Given Iran’s recent counterattack on U.S. positions in Iraq, is the oil market right to exhale? Is the conflict over?
A: Mr. Mills: For now, the immediate risk to oil is over and the market has, after [the attacks on Saudi facilities at] Abqaiq, shown itself rather unworried by threats that don’t lead to a sustained physical outage. However, without an effort at diplomacy, this conflict is not over. At some point, one side will strike again, and impact on oil supply remains a risk.
Q: Have the U.S. sanctions on Iran been effective?
A: Mr. Mills: Sanctions have greatly reduced Iran’s oil exports. China is the only remaining customer, buying about 3 to 500,000 barrels a day from Iran in open and disguised ways. But Iran has been under some kind of sanctions for the past 40 years, so the economy is fairly self-sufficient.
Any hopes on the U.S. side that the Iranian regime will collapse are very naive. Look at Venezuela. The Venezuelan economy is far less diversified than Iran’s. Venezuela’s oil production has collapsed. The government is not as powerful or skilled in repression as Iran. Yet Nicolás Maduro is still there despite U.S. efforts to get rid of him.
Q: Is the market’s reaction following the recent friction between the U.S. and Iran warranted? Oil prices spiked to about $70 and then fell.
A: Mr. Mills: Perhaps you could make the case the market has been a bit too relaxed about Middle East tensions. The U.S. has no clear plan for what happens next. If the U.S. is going to try and sanction Iraq, it would almost be beyond belief to take 4 million barrels a day of Iraqi oil off the market. I think we can probably rule that out.
President Trump would quickly realize that’s impossible—and may damage his chances of reelection. However, it’s quite likely the U.S. could stop giving Iraq waivers for buying Iranian gas and electricity. That would be, of course, quite a major crisis for Iraq.
Q: Could U.S. shale oil production ramp up to replace lost barrels from Iraq?
A: Mr. Mills: If we have several months of steady, strong prices, then yes, there will be more spending and more production. However, it’s just nowhere near enough to replace a major loss of output from Iraq or Saudi for an extended period. And in terms of oil grade, U.S. shale oil is very light and Middle East grades are typically medium grades. They’re not perfect substitutes and there’s definitely a tightness in the market in the medium range.
Q: What else are you watching out for that could affect the energy market?
A: Mr. Mills: The world’s economic prospects are looking better on the whole. I have no great faith in the U.S. trade deal with China. I think tensions will persist. But the market response is positive.
We want to be your first energy read of the week. This newsletter is a production of the global WSJ energy team, which is made up of a dozen editors and reporters in Houston, New York, London and Dubai. Send feedback to John Simons and Neanda Salvaterra at EnergyJournal@wsj.com.
SOURCE: MoneyBeat – Read entire story here.