Right now the energy complex here in North America is so dynamic that it's easy to miss what's happening in the rest of the world. Some revealing data about global oil disruptions, recently published by the Energy Information Agency (EIA), suggests a look over the shoulder. Could an unexpected return of up to 500,000 barrels per day (B/d) of offline oil output upset the apple cart that has been carrying relatively stable world prices for the past couple of years?
Since the beginning of 2012, there has been a seemingly high level of oil that's been withheld from the market, about 950,000 B/d (see Figure 1). Some of the disruption is because of technical reasons, but most of the curtailment can be blamed on recurrent geopolitical themes: armed conflict, state-owned ineptness, UN sanctions, or all of the above. Two regions standout in the current situation: Syria and South Sudan, each withholding 200,000 B/d and 350,000 B/d respectively. Spigots controlled by war-torn Damascus are not likely to re-enter global supply any time soon. But South Sudan is reportedly in a position to resume pumping in the range of 220,000 B/d to 280,000 B/d by the end of this year. Apparently, the oil-rich South's dispute with the pipeline-rich politicos in Khartoum to the north has been settled.
Other regions with potentially imminent restarts are China and Brazil. Each situation is unique, but a hundred thousand barrels here, a hundred thousand there, all starts to add up in a market that is already not wanting for more oil.
How should you think about this if you're in the oil markets? Two quick interpretations are possible: 1) Be worried about an oil price drop as a consequence of the additional output; or 2) Be calm on the probable expectation that it's only a matter of time before some other major producing nation succumbs to strife, sanctions or both. At any one time there is always a producer getting knocked out of the system. Like an uninterrupted sequence, one by one prior to Syria and South Sudan, we've seen Venezuela, Iraq, Libya and Iran become impaired over the past 10 years. It's easy to believe that there will be others following suit.
The latter, second scenario is omnipresent in oil markets, but there is a third way to think about these outages: Regardless of how and where it happens, 1 million barrels on 91 million a day of output represents an impairment of only about 1 per cent. Put another way, it means that non-OPEC oil supply systems are operating at a utilization rate of almost 99 per cent, a tight metric that is exceptional by any manufacturing standard.
Renewed oil production from places like South Sudan will certainly contribute to a looser, better-supplied market this year. So some downward price pressure, maybe a few dollars on North Sea Brent, may follow. However, as opposed to betting on significantly lower prices, the extra volumes are more supportive of the converse dynamic that's been building up over the past year: that rising oil prices are increasingly less likely.
Peter Tertzakian