While Europe Burns, but Iraq probably a greater Supply Risk
I wrote, last month, about the prospect for increasing tensions as outside interests add to Iranian sanctions. Markets are clearly nervous about the low risk, high impact closure of the Straits of Hormuz, through which ships carry up to 17 million b/d – half the world’s seaborne crude flows. Aramco management has been asked to consider its ability to produce 13 million b/d for a short time – an unusual request. However, while Iranian decision-makers might be irrational, are they crazy? More likely, in my view, is that, with the departure of US/coalition troops from Iraq, oil production plans are at risk. For instance – Iraq exports more oil on its 2.7 million b/d than Iran on its 3.5+ million b/d. I would bet that more exports will be ‘lost’ from Iraq than Iran this year.
From a demand perspective, fundamentals appear poor. A warm Northern Hemisphere, clearly weakened European activity, and continued secular decline in US gasoline consumption, all suggest a lower oil price. Most international majors seem likely to increase output this year. In addition, the stronger US dollar is typically a headwind for energy prices. However, early signals of an end to Chinese tightening and Indian destocking might, in conjunction with geopolitical issues, drive a surprise to the oil price upside this year. My conclusion for the oil price in 2012 is ‘likely lower but with a 25% risk of a spike.’