Oil prices have reached a two-and-a-half-year high after a hairline crack was found in one of the world’s most important oil conduits. The Forties Pipeline System, which carries 40% of North Sea oil and gas, is closing for repairs after the fault was found near Aberdeen, Scotland.
This pushed Brent crude to over $65 a barrel, which it hasn’t reached since June 2015.
Tom Crotty, Director of Ineos Group, which operates the Forties network, said that the pipeline’s closure is a “force majeure situation” that will prevent the operator from moving oil through the system for the next two weeks. He said that they will know in the “next few days” how long the system will be closed for. Although routine maintenance work on pipelines is common, closures related to cracks of this nature are not.
Oliver Jakob, an analyst at Petromatrix, a Swiss-based consultancy, said:
“It’s more than just a supply disruption because it’s more significant as a price maker. There’s one thing which is the volume of oil which is lost, but it’s also that it’s a key price benchmark.”
Also, according to McKinsey Energy Insights, the closure may benefit sellers the Middle East and Asia-Pacific region as buyers look at alternatives to the North Sea supply.
Saudi’s $7bn Renewables Push
Saudi Arabia intends to deploy $7bn into renewable energy projects this year.
Editor’s Remarks: The drive will focus on building solar plants and tenders are to be issued later this year for eight separate projects with a total capacity of 4.125 gigawatts. The move is part of a wider drive to feed the kingdom’s growing demand for energy, which is currently eating away at oil the country intends to export. This latest move is also part of Prince Salman’s wider plan to diversify the economy and rely less heavily on crude production. This strategy has played out in a number of ways to date, including heavy investment into SoftBank’s $100bn Vision Fund.
Read more on Renewables:
Oil Prices Climb to Three-Year High
Oil prices climb to a near three year high with Brent Crude trading at just under $70 a barrel. The recent rally has led to highs of $69.62 per barrel, up from $67.69 at the beginning of the week.
The price of oil has been a depressing case for a while now. Three years ago, overproduction led to an oil glut that had already seen a five-month slide. However, in November 2014, the Saudi-dominated oil consortium, OPEC, refused to slow production, leading to a Thanksgiving bloodbath with prices tumbling nearly 15% by Christmas.
From summer highs of $101.94, prices continued to fall reaching lows of $34.37 at the beginning of 2016. It was not until November of the same year that OPEC conceded to international pressure and curbed output.
If the rally continues, oil prices could potentially surpass $70.15, not seen since the Thanksgiving meeting.
Turmoil in Iran: Will It Push Global Oil Prices Higher?
The price of oil finished 2017 with a mini rally. The new year has started with protests and instability in Iran. Some analysts believe this might drive the oil price even higher – but the opposite actually looks much more likely.
Is the Recent Recovery Temporary?
U.S. oil prices have been on a steady rise in recent months and as expected ended 2018 strongly, above $60 a barrel. According to The Independent, the good news has continued into the New Year, and on Tuesday this week prices opened higher than at any time since 2014, driven in part by OPEC and Russian supply cuts but also by news from the Energy Information Administration (EIA) that the huge U.S. stockpiles are now falling.
Since 2016, US oil production has rocketed by 16% to almost 10 million barrels per day. In October crude exports rose to a record two million barrels per day, with production slated to rise as much as 20% over the first half of 2018. This means US supply is now close to parity with top producers, Russia and Saudi Arabia, and, according to the IEA earlier in the year, will likely create a supply surplus in the first half of 2018.
But is this recovery only temporary? And how will the Iran situation play into this backdrop?
Iran May Not Increase Prices
The demonstrations in Iran initially began in response to high food prices and the weak economy, but in recent days the rallies have taken on a distinctly political dimension. Protesters have begun chanting anti-government slogans and hundreds of people have been arrested. To date, more than 20 people have been killed in clashes with the Revolutionary Guard and the protesters show no signs of backing down.
This is turning into the biggest show of public defiance since 2009 and the Iranian leadership has been quick to respond, blocking access to social networks including Telegram and Instagram on Sunday. Though Iranian officials appear conciliatory, acknowledging the protesters’ grievances, one should not bet on this approach lasting very long at all.
Meanwhile, there are reports that the protests sweeping the nation are being used as a cover for militants operating within Iran, giving them the opportunity to strike at key infrastructure and oil production facilities. Ansar al-Furqan, an al Qaeda-linked jihadist group based in Iran, claimed to have blown up an oil pipeline near Omidiyeh in the southern Khuzestan province, the scene of other attacks by Arab separatists.
Traditionally, Middle East turmoil pushes up the price of oil, and the current spate of protests in Iran have undoubtedly played a part in recent price hikes. But while bad news from the Middle East can prompt an initial buying frenzy, sending prices soaring, there’s no reason to believe this hike is anything other than temporary.
In fact, in June last year, when the Middle East was at its most tumultuous, Brent crude remained unmoved. Years of oversupply kept reaction muted, and many market watchers now expect any further gains to be within a tight range.
The substantial growth spikes of the past are now unlikely and there is, in fact, a reason to believe that the world is on the cusp of big price fall.
Temporary Price Rises Prompt Selling
There are some good reasons to doubt that recent rises are part of a sustainable upward trend. Higher prices may tempt OPEC producers to cash in, release more output, and cause the production deal to fail. The non-OPEC producers (such as Canada and Brazil), not bound by the deal, will see the rises as an opportunity to increase production, and higher prices have already led many US drillers to boost activity.
But by far the most significant indicator of price slump caused by over-production is what’s happening in the US shale sector. Technology and new government regulation are two major forces that could tip world oil prices into a catastrophic slump.
To date, oil giants have been slow to capitalise on the opportunities presented by shale. But over the last six months, they’ve begun to focus on creating efficiencies by taking offshore automation and digitisation technologies and adapting them for use in shale drilling. For example, shale oil drills can now plunge deeper into the earth, pivot and tunnel sideways for miles until they hit an oil pocket.
The US isn’t the only country that appears to be taking energy security more seriously. The EU is also now looking at ways to bolster its own supplies, which could lead to a shale or renewables push in the UK and on the continent. Some people have also recently started looking at alternative, cost-effective renewable sources, like biogas Anaerobic Digesters. This could further increase new competition for oil.
This push by the big players in the US oil industry will bring more wells to production at a lower cost and could ramp up future output and company profits. In addition, the Trump administration is focused on oil. It has already approved the controversial Keystone XL pipeline, brought forward plans to allow oil drilling in the Arctic National Wildlife Refuge in Alaska, and is reported to be considering loosening offshore oil drilling regulations. These moves could easily cause an oil race and create a huge over-supply.
While the turmoil in Iran is playing into the price rises that have been seen in recent days, it’s only a small part of a very big picture. Rather than focusing on how the Middle East affects prices, the world should be lifting its vision and focus on the US and the major non-OPEC nations. It’s what they do next that will determine what happens to prices in global oil prices in 2018.
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