Recent events in the Middle East have caused concern among the international community. Experts believe Israel's war with Lebanon could drag on for a long time, Iran has threatened to close the Strait of Hormuz, and an escalation of the conflict could lead to disruptions in global oil trade. What obstacles await oil and how the conflict in the Middle East can affect Kazakhstan and world oil prices, Kazinform agency considered.
Impact of political instability
Recently, the situation in the Middle East has become tense. However, oil analysts believe that this military conflict in recent years no longer has a significant impact on the oil market, but rather causes short-term fluctuations. Askar Ismailov, an expert in the oil and gas industry and director of the analytical company PACE Analytics, explains that the reason is a change in the global energy architecture. Supply diversification and increased domestic production in key regions such as the US, as well as high inventory levels, have significantly reduced dependence on oil supplies from the Middle East.
"The share of oil production from OPEC has decreased to 30%, respectively, the share of the Middle East is even lower. Therefore, the impact of political instability on the oil market becomes less noticeable if it does not affect key oil-producing countries such as Saudi Arabia, Iraq or the UAE," Askar Ismailov said.
An example is the situation in 2019, when attacks on the facilities of the Saudi oil company Saudi Aramco had a short-term impact on prices, which quickly stabilized thanks to the quick response of OPEC+ and the availability of spare capacity.
Olzhas Baidildinov, a member of the Public Council at the Ministry of Energy of the Republic of Kazakhstan, believes that the talks surrounding the oil and gas industry in connection with the escalation of the conflict in the Middle East have little to do with reality.
"I think this is just rhetoric. Because oil and gas have always been outside the brackets of any conflicts. The oil industry in Iraq and Libya was out of the scope of military operations and this did not affect prices much. My view is that there will be no spikes except in the short term. Saudi Arabia and the UAE are poised to increase their volumes and put about 3 million barrels per day on the market. In any case, Iran's supply volumes are small globally. If something happens, such volumes can be replaced by other Gulf countries”, the expert explained.
Will there be losses for the global market?
Iran is among the TOP 10 oil producing countries. According to various estimates, its share in world production is 3-4%.
According to the oil industry expert Dinmuhamed Kudaibergenov, the demand for supply markets that are less susceptible to the consequences of a military conflict will increase, and these can be Far Eastern ports, Black Sea ports. Countries and companies with access to terminals in these regions should gain a stronger foothold before the arrival of large traders.
There is another opinion. Some oil experts say that losses in the world oil market can only occur if the conflict affects the main oil-producing countries in the Middle East, such as Saudi Arabia or Iraq.
"In the event of an escalation, the loss of production volumes in Iran could be offset by existing OPEC+ capacity, which would minimize the impact on the world market. To give you an idea, according to an international organization, Iran's oil production is about 2.5 million barrels per day. OPEC+ production has been reduced to this level”, said Askar Ismailov.
The expert added that it is worth considering that other producers, such as the US, may also increase production to stabilize the market.
What risks will arise if the Strait of Hormuz and seaports are closed?
The Strait of Hormuz, through which about 20% of the world's oil trade passes, is significant in the volume of trade with the raw material. Besides Iran itself, tankers loaded with oil from Iraq, Saudi Arabia, Bahrain, Kuwait and Qatar pass through this natural corridor. By the way, Qatar is currently the largest exporter of liquefied natural gas in the region.
Halyk Research analysts believe that the military conflict could drag on. As Iran plays a key role in the global oil market through its control of the Strait of Hormuz, the threat of a shutdown could send oil prices soaring and put pressure on the global economy. On the day after Iran's response to the assassination of Hezbollah leader Hassan Nasrallah, Brent crude rose 2.3% ($71.85 to $73.56 a barrel), although the hydrocarbon traded at $75.45 on the day per barrel.
According to oil industry expert Dinmuhamed Kudaibergenov, the blocking of the strait will have serious consequences for the hydrocarbon market, and given the coming winter and the diversion of Russian gas to the east, gas prices may once again set records in 2021.
„Nevertheless, we should not forget about the enhanced role of the Persian Gulf states – the dwarves – Qatar and the UAE are important players on the geopolitical map of the world today. They can get involved in diplomatic and other behind-the-scenes negotiations to smooth out the crisis and its impact on the countries”, said Dinmuhamed Kudaibergenov.
And the expert Askar Ismailov is convinced that it is economically and politically unprofitable for Iran to close the Strait of Hormuz for several reasons.
First, economic dependence on oil exports. Iran itself exports oil through the Strait of Hormuz and depends on revenue from its sale. Closing the strait would hurt the country's own economy, which is already suffering from international sanctions. Therefore, Iran risks further worsening its economic condition, which will deepen its domestic problems.
Furthermore, closing the Strait of Hormuz would bring military and political risks. "It could provoke a strong reaction from the international community, including military intervention by the US and its allies to restore freedom of navigation. The Strait of Hormuz is of international importance and its blockade is considered a violation of international law," explained Askar Ismailov.
Secondly, the planned negotiations with Europe. Recently, the new Iranian president has been sending signals of readiness to negotiate with European countries on a number of issues, including the nuclear program. Blocking the strait, as Ismailov noted, could completely undermine the international community's confidence in Iran, making further negotiations and possible concessions impossible. It turns out that it is strategically unprofitable for Iran to close the Strait of Hormuz, as it would cause economic damage and provoke an international backlash.
According to oil and gas experts, if other seaports are closed, the country will face similar consequences, so their closure is unlikely.
Price crash or growth?
Recently, Saudi Energy Minister Prince Abdulaziz bin Salman said that if non-OPEC+ countries do not respect their quotas, the price of oil could fall to USD 50 per barrel. According to the source, the prince's statement said Saudi Arabia was ready to launch a price war if the cartel participants did not honor the agreements. Among the violators, the energy minister named Kazakhstan and Iraq.
According to Askar Ismailov, director of the analytical company PACE Analytics, the probability of the price of oil falling below 50 USD is extremely low. Because this situation is unfavorable for Saudi Arabia itself, which actively invests in new large projects in the country, and is also an investor for other countries. "Even despite local conflicts and geopolitical risks, oil demand remains stable, especially from countries such as China and India. In addition, OPEC+ is ready to reduce production to support prices”, explained Askar Ismailov.
As the expert Dinmuhamed Kudaibergenov emphasized, against the background of the escalation of the conflict, the world oil market reacted sharply - prices rose from a minimum of 70 USD per barrel to 75.7 USD per barrel of Brent oil.
"It should be borne in mind that the Middle East region as a whole supplies up to 1/3 of the world's oil production. Iran, in particular, produces between 3.5 and 3.6 million barrels per day. In case of disruption of the oil and gas infrastructure, prices will rise, experts have already given forecasts for breaking through the level of 80 USD per barrel, the expert added, answering a question about the price forecast.
However, Olzhas Baidildinov believes that the collapse of the price to 50 USD per barrel is a completely possible scenario.
Saudi Arabia and OPEC emerged during the oil crisis that preceded it, and the cartel has always played a role in stabilizing prices. But at the same time, Kazakhstan does not respect the quotas, and other countries that have joined OPEC+ also do not respect them. You need to understand that the cartel is losing its share. That was in the 80s. During those years, the cartel controlled about half of the world's oil production. Then, due to production cuts to support prices, its share was reduced to 30%. This is a phantom historical pain experienced by OPEC and Saudi Arabia. And when they see that prices have stabilized or are not growing as they should (while other countries have increased their share - ed.), naturally, they are ready to expand. Now, Saudi Arabia can easily splash about 1-1.5 million barrels per day on the market for the next 2 years. In addition, the UAE currently produces 3 million barrels per day. They have plans to increase volumes to 5 million barrels per day. In general, there is a lot of oil on the market, and it can come and lower oil prices, and Kazakhstan should be prepared for this,” explained a member of the Public Council of the Ministry of Energy of the Republic of Kazakhstan. .
At the same time, Olzhas Baydildinov explained that oil prices already include a price in the event of a conflict and its consequences. There is currently no significant impact on oil prices.
"Yes, prices went up by $5, but oil prices already included this conflict and its consequences. Overall, I think there will be no spike in the oil market. Even if Iran is completely cut off from supplies, in any case, other countries, even Kazakhstan, have this volume,”, he added.
How will this affect Kazakhstan?
For Kazakhstan, any short-term fluctuations in oil prices could have an impact on export earnings. However, according to experts from the oil and gas industry, this impact will be insignificant.
"Oil production, the lion's share of which falls on Tengiz, Kashagan and Karachaganak, practically does not decrease due to external conditions and is contracted or used by the oil companies themselves participating in these projects. Oil prices, even on the order of 60-70 dollars per barrel, are acceptable for Kazakhstan, and given the current market situation, there is no reason to expect a significant decrease in the demand for Kazakh oil,” commented expert Askar Ismailov.
According to official data, the price of oil production in the major projects in Kazakhstan is in the order of 10-15 USD per barrel, with the exception of the Kashagan project. Thus, the direct impact of the conflict in the Middle East on Kazakhstan's oil industry is unlikely, and rising global oil prices may have a positive impact on the country's export earnings.
Experts agree that if the conflict in the Middle East remains limited, oil exports will not be affected. However, the spread of the conflict to key oil-producing countries such as Iran or Saudi Arabia could cause supply disruptions and a sharp rise in oil prices. In this case, oil markets will depend on supplies from other regions, including Russia and the OPEC+ countries, which will allow them to partially offset their losses.
The Middle East and North Africa have always acted as drivers of changes in the price landscape. All market players, traders, importing countries, mining companies should not underestimate the situation and take their own response strategies. Oil experts believe that exporters can use their advantage to select new buyers who are most profitable in terms of selling price minus delivery. After all, demand may shift to neighboring countries in the region, and Kazakhstan is no exception.
The news was published on the basis of an information exchange agreement between Fakti.bg and Kazinform