Below the waterline: How an oil tanker attack could drive down oil prices

The scandal surrounding the oil tankers attack in the Gulf of Oman is gaining momentum: the leaders of the United States and Saudi Arabia accuse Iran of everything, Tehran denies any claim. For the global oil market, the real discovery was that even at the time of the acute crisis in the Persian Gulf, the price did not really increase. It was impossible to imagine 20 or 30 years ago, when prices were very sensitive to any geopolitical upheaval, even the smallest. At the same time, there is a well-reasoned view that the current tension in the Gulf can actually lower oil prices – provided the card is properly located.

Without enthusiasm

At the end of last week, the Brent benchmark, in the context of news about the weakening of tankers, rose slightly, exceeding $ 62 a barrel. A major event occurred: large oil tankers attack daily in the Persian Gulf. Given the growing tensions around Iran, on which the US administration is exerting more and more pressure, the threat of a serious conflict that could turn into a major war loomed in the # 39; horizon.

Usually, in such cases, there is a gradual escalation, as we see now. The release by the US intelligence services of new data containing charges against the Islamic Revolutionary Guards Corps shows that Washington is serious about ending this subject, despite the moderate voices heard in the opposition. But militant rhetoric this time is not very warms traders well. After the first speculative reaction, the price stabilized and returned to $ 60 earlier this week. And over the past month, oil has dropped by 20%, despite the summer season in the United States, where gasoline demand has traditionally increased.

This development may surprise those who are used to considering geopolitical risks as an important factor in the evolution of oil prices. Indeed, in the past, even the rumors, not to mention the actual events that led to the escalation of conflicts in the Gulf, have had a huge impact on prices. This is not quite true now, and recent events are simply the most characteristic example. In addition, Professor Nick Butler, former vice-president British oil and gas company BP, the current confrontation runs the risk of derailing prices.

According to Butler, which he described in the pages of the Financial Times, the "new standard" price is now established in the global oil market. That happened after the 2014 crisis, when the "old" rate dropped from $ 90 to $ 120. Oil currently fluctuates between $ 50 and $ 80, most often in the $ 60 to $ 70 a barrel corridor.

This new corridor has stabilized for a reason and has become the result of several major factors.

First of all Many "unconventional" oil producers, mainly shale in the United States, have been able to significantly reduce their costs. In 2013, it was rarely profitable to produce shale oil at a market price below $ 80. Now, because of the pressure on equipment suppliers, which had to decrease somewhat and the mbadive construction of infrastructure on the fields, it has been possible to reduce the price of zeroing by about half. As a result, despite the collapse in prices, US production growth over the last 10 years has been about 5 million barrels a day.

Secondly although the demand for oil continues to grow, it happens all the same slower than usual. The world has largely recovered from the effects of the global financial crisis of 2008, but it has not yet recovered the growth rates of the 2000s. China and East Asia have slowed down, their GDP now increases by 5 to 7% per year, compared to two figures 15 years ago. In Europe, consumption decreases even because of government policies to reduce carbon emissions, energy efficiency and green energy tariffs.

However, many traditional producers, although they participated in setting up production quotas at the end of 2016, are in a difficult situation. During the period of high prices, they have not managed to diversify their economies enough, which means that the low price of oil forces them to compensate for the lack of volumes. For example, to balance the budget, Saudi Arabia needs a price of $ 80 to $ 85 per barrel – or a significant increase in production. For the moment, the problem is solved thanks to enormous reserves, but how much is enough Riyadh nobody really knows.

Thus, the main factors are in equilibrium relative to current prices. And here, Iran itself begins to play a key role.

The removal of about half of its exports (about one million barrels a day) has largely contributed to keeping prices fairly decent above or close to the $ 60 a barrel mark.

The worsening of the situation around Iran gives investors an ambiguous signal. On the one hand, few people believe that the United States will actually decide for real declare war on Tehran. Everyone remembers that one of Trump's campaign promises was to end wars without end, costing America a lot of money and making no sense. And the lobbyists of the military-industrial complex here will have a hard time overcoming the prevailing consensus in society that it is not worth fighting with anyone.

On the other hand, if we do not talk about war and that only new sanctions will follow the episode with the tankers, which (say to the maximum) will stop the Iranian oil exports, the oil market will not feel much. One million barrels per day is a lot, but this volume can be closed without any problem by the other participants, who currently self-restrain diligently due to the OPEC + agreements.

Unexpected turn

On the contrary, the situation with Iran can be quite unexpected. Traditionally, escalating interstate conflict is also an opportunity to sit down at the bargaining table and restore order in relations.

Everyone remembers perfectly the Caribbean crisis and its result is the beginning of a 20 year relaxation between the USSR and the United States.

It is absolutely impossible to rule out that even now, events can follow a similar scenario: Trump needs a big success in foreign policy before the elections and Iran because of Sanctions is in a very difficult economic situation. Inflation has exceeded 40% and the country's GDP could fall by 5.5% this year, with little hope of further recovery. After a fairly long period of growth and development, it is difficult for Iranians to live in a state of besieged fortress. Thus, concessions are possible on both sides and, in extreme cases, you can always declare yourself a winner.

What happens next? Iran will be able to increase its exports as quickly as possible by two or even three times. During the last period of easing, significant investments were made in oil and gas infrastructure.

This means that between 1.5 and 2 million barrels of additional oil will appear on the market.

This problem can no longer be solved by setting up regular quotas as OPEC producers are not prepared to limit themselves further.

Under the pressure of these colossal new volumes, the supply on the market will be consistently higher than the demand. The scale will collapse and the "new standard" established over the past four years will enter the story after the old. Then there will be a recalibration period of several months, after which the "last" rate will be set, which can easily be in the corridor of $ 30 to $ 40 a barrel. all the same not fatal, for producers in the Middle East – much more painful, for American shalers – bankruptcy with a probability of 90%).

The only way to maintain the "new standard" in the next few years is a tough embargo against Iran. The political and economic interests of the United States and Saudi Arabia coincide fully.

Dmitry Migunov