Oil & Energy

Date Issued – 18th April 2024

Courtesy of Steve Alain Lawrence, Chief Investment Officer

Janis Urste, Chief Market Strategist

Oil Drops Over 3% Despite Iran-Israel Tensions

Just days after predictions of oil prices exceeding $100 a barrel, crude prices dropped nearly 3% by Wednesday due to diminishing fears of Middle East conflict escalation and growing demand concerns. Brent crude fell 3.18% to $87.16, while West Texas Intermediate (WTI) dropped 3.25% to $82.59, influenced by an unexpected inventory increase reported by the Energy Information Administration. Analysts have also reduced concerns over severe sanctions affecting Iranian oil exports following Iran’s missile strikes on Israel, which had minimal actual impact. Geopolitical tensions persist, however, as evidenced by ongoing proxy conflicts between Israel and Iran, particularly in Lebanon where recent strikes continue.

Potential Israeli Strikes Focused on the Red Sea

Amid rising tensions in the Middle East, Iran is deploying additional navy vessels to the Red Sea to guard its commercial ships, escalating its confrontation with Israel. This strategic move comes as Iran intensifies its support for Yemen's Houthi rebels, enhancing its military footprint in a key maritime region. The presence of significant Iranian naval assets, including the intelligence ship Behshad, signals Tehran's readiness for potential conflict.

This buildup poses a direct challenge to Israeli and U.S. naval forces, increasing the likelihood of military engagement in the Red Sea, a crucial route for global shipping. Such developments also concern nearby countries like Egypt, Jordan, and Saudi Arabia, given their geopolitical and economic stakes in regional stability.

Crude Oil

Iran's crude oil exports surged to a six-year high in the first quarter, averaging 1.56 million barrels per day, predominantly to China, generating around $35 billion. This increase comes as the U.S. and EU consider new sanctions targeting Iran's oil sector in response to its recent military actions against Israel. However, the Biden administration is cautious about intensifying sanctions due to potential impacts on oil prices during an election year and possible strains on U.S.-China relations, given that Chinese purchases represent a significant portion of Iran's oil exports. Additionally, options to counteract rising oil prices are limited, with the U.S. Strategic Petroleum Reserve at its lowest level in four decades.

EU to Sue Germany Over Gas Tariffs

The European Commission is set to sue Germany for imposing gas storage fees that allegedly contravene EU single market rules, potentially inflating gas prices across the bloc. This move follows Germany's response to the end of Russian gas imports and the Nord Stream pipeline shutdown, where it implemented tariffs that have since tripled, to manage the cost of more expensive non-Russian gas. These tariffs are under scrutiny for possibly burdening EU members, particularly Eastern European countries, by raising their gas costs as they transition away from Russian energy. Discussions are ongoing between the Commission and German authorities, with the latter defending the tariffs as necessary for European energy security.

Global Oil Demand Hits 5-Year Seasonal Peak

Global oil demand rose by 1.2 million barrels per day (bpd) in February, marking a five-year seasonal high driven by increased gasoline and jet fuel consumption and record demand in India, according to the Joint Organizations Data Initiative (JODI). Despite a decrease in India's crude oil imports, its total product exports reached a seasonal high. Conversely, China saw a decline in oil demand during the Lunar New Year.

OPEC projects strong summer fuel demand will continue to support oil consumption growth, anticipating a global increase of 2.2 million bpd in 2024 and 1.8 million bpd in 2025. However, the International Energy Agency (IEA) has revised its 2024 forecast down to 1.2 million bpd, below OPEC's estimate.

Kazakhstan Seeks $150 Billion in Oil Compensation

Kazakhstan is pursuing over $150 billion in compensation from oil majors involved in the Kashagan oilfield, escalating previous claims to include $138 billion for lost revenue due to unmet production targets, on top of an existing $15 billion claim related to project costs. This litigation began in April 2023, with the country initiating arbitration to recover around $16.5 billion for costs from the Kashagan and Karachaganak fields under profit-sharing agreements. The North Caspian Operating Company (NCOC), which manages Kashagan and includes global firms like Eni, ExxonMobil, and Shell, has invested about $55 billion in the project. Ongoing disputes pertain to the application of terms within the Kashagan production-sharing agreement.

Japanese Refiners Prepare to Use Reserves Amid Supply Concerns

Japanese refiners, prepared to tap into national reserves if Middle Eastern conflicts disrupt oil supplies, currently face no immediate supply threats, as stated by Shunichi Kito, president of the Petroleum Association of Japan (PAJ). Japan has sufficient reserves for 240 days of oil consumption. While the country primarily relies on Middle Eastern crude, it is exploring alternatives from West Africa and North America, although compatibility with existing refinery specifications remains a challenge.

This proactive stance follows recent geopolitical tensions, including Iranian air attacks on Israeli targets, which have heightened concerns about oil market volatility and supply security, highlighted by the International Energy Agency (IEA).

Oil Exports

May exports of CPC blend crude from the Black Sea are expected to decrease by 12% to 4.9 million metric tons due to maintenance at Kazakhstan's Tengiz oilfield, according to Reuters. The Tengizchevroil consortium, led by Chevron, operates the field, which is crucial for the Caspian Pipeline Consortium that transports 80% of Kazakh crude to the Novorossiysk port on Russia's Black Sea coast. This reduction has already caused a rise in CPC Blend prices for May, and could tighten the oil market as summer demand increases. Meanwhile, Kazakhstan exceeded its March OPEC+ oil production quota by 131,000 barrels per day and plans to offset this overproduction in the coming months.

[Disclaimer: This article provides financial insights & developments for informational purposes only. It does not constitute financial advice or recommendations for investment decisions.]

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