From the Economist's Chair: The geopolitics of crude

Author David Fyfe, Argus Chief Economist

From the Economist's Chair: The geopolitics of crude - Trade disputes, sanctions and changing trade flows. Geopolitics remain pivotal in influencing crude prices and investor sentiment – to both the upside and downside.

Ahead of the Argus Global Crude conference in Geneva, 14-16 October, Argus chief economist David Fyfe speaks to editor in chief Diane Munro about some of the key factors that are critical in driving the global crude market including: trade disputes, sanctions and changing trade flows. They also explore what the future holds for the key OPEC+ members and how robust their agreement to restrain supply will prove.

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- Diane Munro
We're talking with Argus chief economist David Fyfe who will be leading a panel on the geopolitics of crude oil at the upcoming Argus Global Crude conference taking place in Geneva, October 14th to 16th.

- David Fyfe
Thanks very much Diane. I'm really looking forward to the conference; I have taken part in the event since 2012 when I was based with a trading company in Geneva; so it's great to be part of the Argus team this time around.

Pretty early on in day one we have a panel on the geopolitics of crude oil and we're very lucky to have James Foster from BP Oil International on the panel, alongside Neil Atkinson, who works at the Oil Industry and Market Division of the IEA in Paris, and Fernando Ferreira who's head of the Geopolitical Risk Service at Rapidan Energy.

So I think we'll have a nice rounded picture from a trading company, from someone who's involved with strategic stockpiles, and a group that looks at geopolitics and Washington policy. So I think it should be a very good session.

- Diane Munro
Sounds great. In today's market, we have sanctions on Iran's crude exports, collapsing Venezuelan production and a seemingly daily threat to shipping in the Mideast Gulf. Yet prices for global benchmark Brent are struggling to hold up at sixty dollars a barrel. Why is this?

- David Fyfe
I think it really talks to a sort of market backdrop that we have, when these geopolitical events are occurring. I kind of feel that when you're in a relatively soft market, geopolitical events on the supply side can provide a floor to prices, whereas when you're in a tighter market, when supply demand fundamentals are looking a bit more strained, then that's when you start to get a risk premium. So I'd see very much at the present time, we're in a situation where geopolitics is helping provide a floor because of macroeconomic events that are occurring globally.

- Diane Munro
So, so far does that mean there's no impact on the loss of Venezuelan crude or Iranian barrels, or has it affected the market in other ways?

- David Fyfe
As I said, I think it's helping provide a floor to the flat price for crude. I think where you can see the loss of some of these barrels, out of Iran and Venezuela, is much more in the relative value of heavy sour crudes, which have been pretty strong compared to lighter sweeter grades and you've also seen a shift in trade flows; the US has been replacing Venezuelan barrels over two or three years now and that's very much being topped up I think with supplies out of Canada. So it's been a shift there.

I think when you look at Europe, and over the past six months what Europe's been doing to replace Iranian supplies, it's been taking crude out of elsewhere in the Middle East, but also interestingly about a million barrels a day of US crude coming into Europe now. So it really talks about shifting trade flows.

- Diane Munro
What about the protracted China US trade tensions: what's the likely impact on oil here?

- David Fyfe
I think that's interesting, because when we talk about geopolitics and crude, we tend to think of supply disruptions, but whether it's US China trade, whether it's tensions surrounding North Korea, what's happening in the South China Sea, or even most recently in August, as we speak, what's happening between India and Pakistan. There could be demand side impacts here.

We've done a bit of work looking at the potential for the trade war between China and the US to slow economic growth. And what you could be looking at by the end of 2020 is, you know, a net downgrade to demand expectations of up to half a million barrels a day. So, geopolitics isn't just about supply reductions, it can also be about the impact on economic activity and oil demand.

- Diane Munro
What do you think about what the future holds for key OPEC+ members - Saudi Arabia, Russia, Iraq and others - and how robust do you think their agreement to restrain supply will prove to be?

- David Fyfe
A lot of the heavy lifting if you like, from the OPEC+ grouping and their market management policy. It's actually been performed by Iran and Venezuela and the reductions in supply that we've seen there. Saudi Arabia has trimmed supply, but if you look across the rest of the organization, really over the last two to three years, there hasn't been voluntary cuts by many other members. And I think what would become very, very interesting, running into 2020, if we have economic slowdown, is how does that internal dynamic between the Saudis, the Russians and the other OPEC members outside of Iran and Venezuela; how does that begin to play out?

- Diane Munro
Thank you very much, David. I look forward to your panel at the conference in Geneva. All best wishes.

- David Fyfe
Thanks very much; I'm very much looking forward to the event and look forward to seeing all our listeners on the 14th to 16th of October.

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