Oil price strength in the second quarter of 2018 has been driven by geopolitics, in particular heightened tension in Syria and in the Middle East, and subsequently the U.S. withdrawal from the Iran nuclear deal. Hence, the Euler Hermes model confirms that the market is now being driven by concerns over geopolitically induced supply shortages that may or may not materialize.
What are the risks of shortfalls in Iran and Venezuela?
A full loss of production from Iran is very unlikely. Compliance levels with sanctions might be lower this time than previously when there was multi-lateral buy-in. However, the shortfall from Iran comes at the same time as prospects for further shortfalls resulting from the Venezuelan economic and political crisis, of around 0.5 million barrel per day.
Altogether, in a realistic scenario, the market could lose about 1mbdp of oil supplies going forward.
Which countries could mitigate these shortfalls?
OPEC could step up production, notably Saudi Arabia where there is available capacity. But Saudi Arabia is unlikely to act on its own; any increase in production would have to be agreed within Opec and with Russia. In parallel, the U.S. government has entered into talks with international oil majors in order to gauge scope for them to increase production.
Finally, the market could also see further production growth from the U.S., albeit limited in 2018.
What are our scenarios?
Our base case for the remainder of the year stands at $72/barrel (bbl). We assume 2018 GDP growth of 3.3 percent, and 0.5 mbpd supply loss on the assumption that most of the loss from Iran will be mitigated while Venezuelan production shortfalls will not. OPEC has about 2 mbpd of spare capacity and there may be room for marginal growth from U.S. production.
Our bullish scenario reaches $80/bbl. This assumes 2 percent U.S. dollar appreciation, with 1.5 mbpd production loss from Iran and 0.5 mbpd from Venezuela.
Our bear scenario is at $67/bbl: we reduce our GDP growth forecast to +3 percent and assume a 5 percent U.S. dollar appreciation while at the same time assuming full mitigation of all production shortfalls from Iran and Venezuela, along with a small 0.5 mbpd increase from U.S. shale production.
For 2019, our central forecast stands at $69/bbl, assuming +3.1 percent in global GDP growth, 2.5 percent U.S. dollar appreciation and 2 mbpd oil supply growth. It also includes the strong likelihood of some OPEC production increases, and U.S. shale production becoming debottlenecked in the second part of 2019.