Oil prices consolidate on developments over Syria

President Obama failed to gain meaningful support during the G20 and back home, diminishing the possible military strikes against Syria from highly possible from a week ago to less likely.

A possible scenario from the development of events is Russia demanding President Assad hand over chemical weapons, meaning there wouldn’t be any strikes against Syria. This was reflected in crude retreating further from its high.

Crude rallied on the back of better-than-expected Chinese and US economies, possible disruptions from retaliation from Syria and speculation that supply inventories are at a low. The data from EIA showed supplies slipped as refineries had to meet gasoline demand during the summer.

The lacklustre NFP number indicated the US economy might not be ready for a meaningful tapering and a chance the Fed might delay this. Output from Libya, previously shut due to protests, has been restored with production increasing to 600,000 barrels a day. All export terminals will be open next week according to Sliman Qajam, a member of the Libyan parliament energy committee.

Consolidation

All these have capped the upside on Olie - Brent Crude and WTI, with both consolidating most of last week and this week while these problems are resolved. Why is crude still trading above $100 when the issues that propelled it to the high are diminishing? The answer may lie in the fall in production and supply. We will look into countries such as Libya, Iran and Iraq in their efforts to boost crude production.

The prolonged strikes in Libya have disrupted supply from its peak of over 3 million barrels in the 1970s. Production in Libya has been on a steep decline since September 2012. If the government can resolve issues with protesters and gangs targeting production, the country can push production up, although reaching the peak of over 3 million barrels a day might be difficult at this point.

Libya Oil Production
Libya Oil Production

 

Iran and Iraq

Initial fears of an attack on Syria are a possible disruption to crude output from neighbours such as Iran. The country is currently producing 2.6 million barrels a day, less than half of what it was producing during its peak. Iran’s oil production in the 1970s was close to 6 million barrels a day. Civil unrest caused a dramatic drop in output and production never reached the peak due to the war with Iraq, and the subsequent US sanctions.

Given that Iran has one of the largest oil reserves in the world and was once the second largest producer of crude, the government is working hard to increase production. Iranian Oil Minister Bijan Zanganesh said they are laying the groundwork to cooperate better with international oil companies and they are determined to hit a target of 4 million barrels a day during his term.

Iran Oil Production
Iran Oil Production

 

The situation in Iraq is favourable compared to the other countries due to infrastructure and investments from oil companies. Iraq has ambitious plans to increase oil export by 1.7 times, which would make it one of the biggest producers of crude. The government has ambitious plans to increase production as crude exports make up a majority of its income. Daily exports of 2.6 bpd in August raised revenue of $8.3billion according to their oil ministry spokesman. Iraq’s oil production is almost at its peak of 3.4 million barrels a day from the late 1970s, currently at 3.2 million barrels a day.

Iraq Oil Production
Iraq Oil Production

 

These countries contributed close to 40% of OPEC’s production during their peak production. They are currently at 20%. Increasing their production by resolving their issues could see crude prices trading lower, however some of these issues tend to be difficult in nature and a finding a quick resolution is challenging.

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