Wednesday, September 27, 2023
Homethe worlds biggest risksSteady oil market at risk from sabotage, instability

Steady oil market at risk from sabotage, instability

The oil market has had a "remarkable three years" in the words of BP CEO Bob Dudley, with prices stable at around $100 per barrel as supply disruption in North Africa and the Middle East was matched by an unexpected increase in production from the U.S.

(Read more: We are not in any discussions with Iran: BP Chief)

However, analysts have flagged several factors that could disrupt this delicate equilibrium, including declining growth in energy demand, sabotage in Nigeria and the lifting of sanctions on Iran.

Read below to find out more.

Education Images | Universal Images Group | Getty Images

Falling growth in energy demand

Global demand for energy will rise 41 percent between 2012 and 2035, or an average of 1.5 percent per annum, according to a BP report published last week. However, the rate of growth is seen declining during the period, from an average of 2 percent a year pre-2020, to 1.2 percent a year afterwards.

BP noted that growth in energy demand between 2002 and 2012 was the strongest ever seen in a 10-year period — a trend it was not expecting to be repeated in the short-to-medium-term, thanks to increased energy efficiency.

"That growth rate (between 2012 and 2035) is slower than what we have seen in previous decades, largely as a result of increasing energy efficiency… Energy efficiency promises to improve unabatedly, driven by globalization and competition," said BP.

Furthermore, oil is expected to be the slowest growing fuel during the period, with demand growing at an average of just 0.8 percent per annum.

"The oil market figures are staggering," BP Chief Economist Christof Ruehl told CNBC.

"By 2035, OECD oil demand will be back to where it was for 1985, and if you take a sub-set, namely the European Union, that demand will be back to where it was in 1967… This does raise the very intriguing question: is it possible, and what are the possibilities under which, you can have sustained economic growth with declining energy demand?"

(View more: Oil demand to decline before 2035: BP)

Iranian oil sales

If international sanctions against Iran are lifted this year, Iranian oil sales could return to the 2.5 million barrels per day (bpd) seen in early 2012, pushing global oil prices lower.

So far, Iran has struck a six-month interim deal with the UN Security Council, which took effect on January 20. The country agreed to limit its nuclear enrichment program in exchange for certain international sanctions being lifted. While Iran is still only allowed to sell 1 million bpd of crude oil, a successful deal could see a long-term pact being struck, with all sanctions — including those on oils sales — being lifted.

Political research firm Eurasia said such a deal would "almost certainly cause an (oil) self-off in an increasing bearish market".

(View more: Whatthe Iran nuclear deal means for oil markets)

Arab Spring tensions remain

Supply tensions have been a key feature of the oil market since the Arab Spring in 2011, with disruption continuing in 2013-14 due to civil war in Syria.

(Read more: US failed over Syria, Saudi prince says)

BP estimated that political instability since the Arab Spring had removed more than 2 million bpd from the markets, and said history suggested production could take more than 10 years to recover.

Christopher Main, an oil strategist at Citi, said geopolitical instability was becoming more problematic for oil majors as they moved their drilling efforts away from established locations like the U.K.'s North Sea.

"The large growth areas you look at over the years are probably North America, South America, maybe West Africa and Iraq," Main told CNBC. "Iraq has been earmarked as having huge potential growth in both the north and south, but sectarian violence is causing more problems there."

He added that even in Brazil — another growth region — political turbulence was higher than in the likes of the U.K. or the U.S., and therefore held greater risks for oil firms.

"The geopolitical risk premium in Brazil would be higher than North America; there were riots there last year and there are ongoing issues with pre-sale auctions," Main said.

(View more: Riots break out across Brazil)


Most Popular