Spike in oil prices possible
DEN SOMERA
While we’re being lulled by the political circus that unfolded in the House of Representatives last Monday and the unbelievable straightforward and no-cussing delivery of the SONA by President Rodrigo Duterte, a wicked event happened across the globe over the weekend that, when left out of control, may spoil all the fun — and market uptick — we’re now enjoying. This is how oil prices could rise above $250 a barrel out of the threatening stance taken by Iranian President Hassan Rouhani against US President Donald Trump for the latter’s pressure to halt Iranian oil exports over its nuclear program.
I was already troubled by an earlier report on the possibility that the price of oil may go up to $150 a barrel. I called up to verify how this could happen with oil professional and friend “Old Legs” who sent me two news articles about how the price of oil could hit $200 or even to $250 a barrel.
Conventional reasoning
In that report, the conventional conclusion I got was that because the average price of gasoline has dropped by 30 percent since 2014, this has resulted in the sharp decline of capital expenditures from exploration and production companies. For instance, oil and gas producers worldwide have slashed their capital expenditures by almost 50 percent, since then.
The pressure from investors to reign in capex didn’t help as well for energy companies to maintain their capital investment programs. This meant fewer drillings were made within the period and as reserves were getting depleted, no additional sources were made. Thus, “the number of new conventional oil discoveries outside of North America has fallen to the lowest level since the early 1950s,” the report pointed out.
Now, capital spending is estimated to be below levels required to offset depletion. By some estimates, the oil and gas industry need to invest a minimum of $3 trillion per year to meet present stream of demand.
This amount could now be feasible with the recent recovery of oil prices to nearly $75 per barrel. However, it takes time to explore and discover new oil resources. Meanwhile, the industry could face supply problems as it’s happening now.
The resultant shortfall, the report concluded, will result in a spike in prices, “potentially much larger than the $150 a barrel spike witnessed in 2008.”
No doubt, the industry’s lack of capex over the past few years will be driving oil prices higher. Add the geopolitical concerns, like the trade wars between China and the US and sanctions against Iran and other related countries, the report further concluded that oil prices can only head higher from hereon.
Geopolitical considerations
In her article on energy and metals, seasoned writer Irina Slav quoted analysts that “crude oil prices could jump as high as $250 a barrel if Iran pushes through with its threat to close the Strait of Hormuz in response to U.S. pressure on oil buyers to cut their Iranian purchases to zero.”
This was exactly the rhetoric Rouhani used in a gathering of Iranian diplomats last Sunday as he was quoted saying that Trump should “not play with the lion’s tail, (as) this would only lead to regret.” He reminded Trump that “Iran has a dominant position in the Gulf and the Strait of Hormuz.”
The strait of Hormuz is “the strait between the Persian Gulf and the Gulf of Oman, which provides the only sea passage from the Persian Gulf to open sea. “It is one of the world’s most strategically important choke points.”
Iran lies on the north coast while the United Arab Emirates and Musandan (an enclave of Oman) lie on the south coast.
Available statistics show an average of 14 tankers per day pass out of the Persian Gulf through the Strait carrying 17 million barrels (2,700,000 m3) of crude oil, representing about “35 percent of the world’s seaborne oil shipments and 20 percent of oil traded worldwide.”
More than 85 percent of these crude oil exports reportedly “go to Asian markets, with Japan, India, South Korea
and China the largest destinations.”
At its narrowest, “the strait has a width of 29 nautical miles (54 km).” In April 1959, Iran altered the legal status of the strait by expanding its territorial sea to 12-nautical-mile (22 km). In July 1972, Oman expanded its territorial sea to 12 km by decree.
With these tactical moves by both countries, the Strait of Hormuz was completely “closed by mid-1972” by the combined territorial waters of Iran and Oman.
In obvious reference to the chokepoint created by these tactical moves made by both countries, Rouhani said,
“Anyone who understands the rudiments of politics doesn’t say ‘we will stop Iran’s oil exports,’ we have been the guarantor of the regional waterway’s security throughout history.”
Nevertheless, the United States doesn’t recognize any of these claims made by Oman and Iran and has since then contested each of them.
Bottom line
With Rouhani’s added statement that “America should know that peace with Iran is the mother of all peace, and war with Iran is the mother of all wars,” observers find these words to mean that in the end of the fighting stance he showed he “was still leaving open the possibility of peace between the two countries.”
Observers contend, as well, that Trump’s twitter direct message to Rouhani may have a telling effect, if not, for its terrible threat as he said: “Never ever threaten the United States again or you will suffer consequences the likes of which few throughout history have ever suffered before. We are no longer a country that will stand for your demented words of violence & death. Be cautious!”
Under these circumstances, the idea of blocking the Strait of Hormuz is very unlikely. But the prospect of oil prices skyrocketing to $200 or $250 a barrel can still happen as tensions heighten and Iran can still hypothetically make good of its threat to take military action — short live as it may be – to close the Strait of Hormuz.
Whatever it is, it’s the consensus that with the current status of production, geopolitical tensions and actual demand considerations across the globe for the commodity, the price of oil will stay high at the $70 to $80 a barrel range for the rest of the year.
Week 21 in the game
As of this writing, only Pixiu has started to actively trade for the period July 23 to 27 of Week 21. She had five selling and two buying (for a total of seven) trading orders for execution last July 25. Her selling orders for Ferronoux Holdings, Inc. (FERRO) and Alliance Global Group, Inc. (AGI) were “Not Done” while the rest of the trading orders were “Done.” These will be reported in detail next Tuesday on the overall results of the virtual stock trading challenge for Week 21.
(Den Somera is a licensed stockbroker. The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. E-mail address of the writer is den.somera@manilatimes.net
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