Our Commodity Strategy team, led by Helima Croft, has long contended that given the oil market’s fundamentals, any potential geopolitically-driven supply disruption would have an outsized impact versus recent years when the market was awash in crude. This necessitates classifying the risks and stacking up potential outages, which in our view could potentially be quite significant across Iran Venezuela, Nigeria, Libya and even Iraq. At the same time, we think spare capacity is more limited than many market participants suggest and underappreciated geopolitical contagion risks abound across the region.
Iran: Winter is Coming
With the most punitive economic sanctions set to snap back on Iran on November 4, export losses are set to mount. Meanwhile, beyond the barrel loss and the tightening fundamental backdrop, we think oil’s fear premium could stage a comeback depending on Iran’s response. A recent terrorist attack in the country could also exacerbate the already dangerous antagonisms in the region.
Venezuela: In Crisis
Venezuela, which arguably has progressed past the “risk stage” given that its production is already in free-fall, shows no signs of recovery. Considering the gloomy path that the economy and oil production are on, losses continue to mount and the economic calamity there is a material reality.
Libya and Nigeria: Instabilities
Libya and Nigeria continue to pose reasonable risks for production outages given instabilities in both countries. Libya is sitting on the disruption bubble given ongoing political fault lines, heavily armed groups, and terror threats. In the case of Nigeria, militancy in the Niger Delta remains a persistent, albeit hard to predict, threat.
Iraq: Still Problems
Iraq finally has a new Prime Minister after months of political uncertainty and paralysis following controversial May elections which saw Muqtada al-Sadr's political bloc win the largest number of seats in parliament. That said, while there may be a new government, there remains many of the same problems.
This report outlines the geopolitical risks that may impact to crude oil production and the potential capacity issues facing various major oil-producing countries.