Oil price remains elevated on continued supply concerns

The oil price continues to hover at around US$100/bbl, despite the largest ever release of emergency oil stocks by IEA member companies

Stocks will be made available by IEA Member countries in Asia Oceania immediately while stocks from IEA Member countries in the Americas and Europe will be made available starting from the end of March, to mitigate what the IEA calls “the largest supply disruption in the history of the global oil market.”

The oil price reflects continued supply concerns, with no end in sight of the effective closure of the Strait of Hormuz, through which around 20mn bpd of oil had previously passed. With Iran threatening to attack ships of those it considers US allies, as well as the threat of potential mines, traffic through the critical chokepoint has almost ground to a halt, prompting President Trump to call for US allies to send ships to secure the Strait.

Nick Butler, head of Strategy at bp and former to adviser to former UK Prime Minister Gordon Brown, warned on the BBC’s today programme that there is likely to be a “significant shortfall of supply over the next two months”, which governments need to prepare for, with a physical shortage of supply in a few weeks’ time. He warned of price volatility and competition between governments for supply.

The Gulf’s energy infrastructure remains under threat from Iran, with Fujairah, a critical storage and bunkering hub, most recently recording damage from drone strikes.

Gulf shut-ins could reduce regional crude output by 70% to around 6mn bpd if the US-Iran war drags on, according to energy consultancy Rystad Energy.

“Further cuts from major Middle East oil producers cannot be ruled out as storage tanks fill to the brim, bypass infrastructure approaches its limit, and the conflict shows no sign of a near-term resolution.

"Although the likelihood of oil supply falling to 6mn bpd is not our central case, it is still very much in the cards. If and when the crisis reaches an end, it will take months to restore operations to pre-conflict levels, with the questions of infrastructure integrity and a recalibrated geopolitical order still at play,” said Aditya Saraswat, MENA research director, Rystad Energy.

International energy companies have also reported disruption to their operations in the region, with TotalEnergies reporting that production has been shut down or is in the process of shutting down in Qatar, Iraq and UAE offshore, representing approximately 15% of its total output. However operations at the Satorp refinery in Saudi Arabia are currently not affected. The company says the impact of LNG production shutdowns in Qatar on its LNG trading activities is limited, as most Qatari LNG is marketed by QatarEnergy. Meanwhile Shell has declared force majeure on LNG cargoes it buys from QatarEnergy and sells to its clients worldwide, following QatarEnergy’s halting of LNG production and declaration of force majeure on LNG shipments.