Written by: Gary Ashton
Oil prices ended last week up more than 3% on Friday when news broke that the United States killed a top Iranian general in a drone strike at the airport in Baghdad, Iraq. The market is worried that a wider Middle East conflict could be in the making. The US strike marks a new low in deteriorating relations between the US and Iran. President Trump has re-initiated economic sanctions against the country that the Obama Administration relaxed. In response, Iran has acted against oil tankers in the Persian Gulf, allegedly sponsored an attack against a Saudi oil refinery and most recently backed rebels in a move against a US army base and the US embassy in Iraq.
Market price actionshows concern that the latest US action could cause oil prices to spike if Iran retaliates in a way that disrupts global supply. Many market pundits and economists are not concerned, however, about the effect on global growth, citing abundant global supply from producers like Russia, the US and other non-OPEC nations. (For more see, What the Oil Market May Be Telling Us About 2020).Additionally, the world economy is less dependent on oil than it used to be. According to an IMF Oil Study, the share of world oil consumption to GDP in barrels per GDP has declined to about 40% of what it was during the 1971 oil crisis and is trending lower to 30% by 2025. In other words, rising oil prices are less likely to spark a global economic recession than in years past.
Iraq’s relations with the US and Iran is complicated, with the country caught between the two powers. The US still has approximately 5,200 troops based in Iraq, while Iran shares a land border with Iraq and views the country as a competitor on the world stage for oil market share. According to the BP World Statistical Review, both countries have approximately a 5% share of the world oil market as of 2018, but Iraq is a comeback story. In 2018, Iranian production decreased by more than 6%, while Iraq production grew by almost 2%. Over the 10-years 2007-2017, Iraq oil production grew at an annual average rate of 7.8%. Production in both countries was around 4.7 million barrels per day in 2018, according to BP statistics. S&P Global Platts estimates that Iranian oil production was only 3.6 million barrels per day in 2018 and has collapsed by nearly a third to 2.43 million barrels per day in 2019 under the weight of US-led economic sanctions. Understandably, Iran wants to be part of Iraq’s future and benefit any way possible from the improving economy and oil production picture in that country. Markets hold their breath now waiting to see what, if anything, Iran does next. 2020 is off with a bang.