Baku, Azerbaijan, Oct.22
By Leman Zeynalova – Trend:
Although oil has always been a cyclical industry, geopolitical risks, especially those coming from OPEC producers, have greatly contributed to the volatility in oil prices, the US JP Morgan Bank said in its reported obtained by Trend.
The bank analysts say that a lot has changed since the formation of OPEC 58 years ago, including OPEC participants and the demand for oil, but the importance of OPEC in relation to global politics has remained firm over time.
“Despite variations in member countries and the demand for oil, which has more than trebled since 1965 (based on BP statistical review), oil, power and politics have been intertwined since OPEC’s inception in 1960,” said the report.
The sheer size of OPEC’s supply makes it a big stake holder in oil markets, according to JP Morgan.
“OPEC producers control close to 40 percent of the global oil supply (including Natural Gas Liquids) and their proved oil reserves account for 74 percent of global oil reserves. However despite the attempts made by OPEC to dampen oil price volatility, OPEC has always been surrounded by heightened geopolitical events,” said the report.
The price response to geopolitical risk is higher from OPEC’s Middle East members, as those countries account for 73 percent of total OPEC supply and also control one of the main conduits to oil flow, i.e. the Strait of Hormuz, according to the bank analysts.
Furthermore, the Global Terrorism Database reveals that in 2017, 35 percent of total terrorist attacks in the world took place in the Middle East and North Africa and have impacted supply in the region resulting in oil price volatility, said the JP Morgan.
“Two years of lower oil prices resulted in OPEC member countries’ foreign reserves (mainly Saudi Arabia) to decline as fiscal oil breakevens remained above the spot price for most of the producers. It was not until Dec 2016, under the new Saudi oil leadership of Khalid Al-Falih, when OPEC managed to garner support from some of the non-OPEC members, which helped balance the markets,” said the report.
JP Morgan analysis suggests markets have been balanced by both strong oil demand growth since 2Q17 but also by tighter supply due to more than expected compliance from OPEC-NOPEC resulting in withdrawal of OECD crude inventories (industry crude stocks) every quarter since then.
“The United States’ involvement as the second largest producer of crude and oil products has changed the global oil dynamics and politics. Their ability to export oil to buyers as far away as Asia, which has been typically the stronghold of OPEC countries, is not only likely to cause a change in oil flows but also will likely recalibrate oil’s political landscape. In the near term, as markets are somewhat balanced, we believe oil prices will remain sensitive to the geopolitical uncertainties ahead,”
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