Geopolitical Risk Premium Is Back In Oil

WTI and Brent jumped to one month highs on the news of U.S. airstrikes in Syria, and while direct risks to oil supply are limited, oil traders are on edge.

The U.S. launched airstrikes on a Syrian airbase late Thursday in response to the alleged use of chemical weapons by the Syrian government. The attacks come despite comments as recently as last week from the Trump administration that removing Syrian President Bashar al-Assad was not a priority. Secretary of State Rex Tillerson is scheduled to meet with his Russian counterpart in Moscow next week amid deteriorating U.S.-Russian relations. Syria produces only marginal volumes of oil, some of which has been under ISIS control. Nevertheless, due to its proximity to Iraq, a widening of the military conflict could induce a higher risk premium on oil prices. If action from the U.S. is limited to these airstrikes, oil prices won’t be affected much, but the upside risk is there if the U.S. gets more involved. WTI and Brent jumped to one-month highs on the news.

Iran oil production and exports stagnate. Iran will struggle to grow its exports from current levels without large levels of new investment and technology from international companies, according to Reuters. Iran succeeded in ramping up exports last year, but much of those gains came from emptying out storage that had built up after years of sanctions. Iran resorted to stashing oil on tankers in the Persian Gulf when sanctions were tightened in 2012, and had amassed 40 million barrels of oil on the eve of the removal of sanctions. That provided an injection of cash in 2016. Iran was able to boost output from 2.9 mb/d to 3.6 mb/d by last summer but then output flattened out. "Iran needs billions of dollars of investment to boost crude oil production and natural gas capacity," Mehdi Varzi, a former official at state-run National Iranian Oil Company, told Reuters. "Most of the fields were discovered many decades ago and are way beyond their production capacity," he said.

Venezuelan protests fill streets. The political crisis in Venezuela took another turn this week. The government, desperate to cut an oil deal with Russia’s Rosneft, had the Supreme Court attempt to take powers away from the National Assembly, which would pave the way for a sale of some oil fields. But the Supreme Court backtracked last weekend. That didn’t mollify protestors, who called the court’s move a “coup” by President Maduro, intent on establishing a dictatorship. Large protests rocked the capital on Thursday. The events are fluid and complex, but Venezuela has $3 billion in debt payments that fall due in April, and a shrinking pile of cash with which to pay. Analysts seem to think they will meet this payment, but other debt obligations later this year could prove more difficult.Related: OPEC Can’t Stop The Beat: U.S. Adds 10 Oil Rigs

Saudi Arabia burning through $6.5 billion per month. Saudi Arabia has long maintained a fixed currency peg, but low oil prices have forced the government to burn through foreign exchange in order to keep up government spending and keep the currency stable. Cash is down to about $500 billion from a peak of $737 billion in 2014. The rate of decline is worrying although not yet a crisis.

Goldman Sachs’ top picks for oil and gas companies. Goldman Sachs’ favorite stock picks include Marathon Petroleum Corp. (NYSE: MPC), Valero Energy (NYSE: VLO), Husky Energy (NYSE: HSE), Chevron (NYSE: CVX), and Suncor Energy (NYSE: SU). Goldman also upgraded PBF Energy (NYSE: PBF) to a ‘neutral’ rating. On the other hand, the investment bank downgraded Imperial Oil (NYSE: IMO) and HollyFrontier Corp. (NYSE: HFC). Goldman Sachs expects WTI prices to rise to about $57.50 by the middle of the year.

Deepwater costs fall by one fifth. According to a new Wood Mackenzie report, the cost of expensive deepwater drilling has fallen by one fifth since 2014. “We are at last beginning to see the first signs of recovery in deep-water,” because of the decline in costs, said Angus Rodger, an analyst at Wood Mackenzie. “We are now seeing scaled-down projects emerge with less wells, more subsea tie-backs, and reduced facilities and capabilities,” he added. “All this translates into lower break-evens.”

Banks to increase credit lines for drillers. The credit redetermination period is underway and a survey from law firm Haynes & Boone finds that most analysts expect banks to not only keep credit lines intact, but could even increase them in some cases. That stands in sharp contrast to prior redetermination periods – which happen twice a year – in which drillers suffered credit reductions because of low oil prices. The survey finds a projected increase in the borrowing base for shale drillers by 10 percent from last year’s levels.Related: Saudi Arabia Vs. Russia: The Next Oil Price War

BP cuts CEO pay. BP (NYSE: BP), in a bow to shareholder pressure, slashed CEO Bob Dudley’s maximum pay by as much as $3.7 million over the next three years. The move came after a majority of shareholders voted against Dudley’s pay package last year, a 20 percent increase from the year before.

Ford to introduce EVs in China. Ford Motors (NYSE: F) said that it would start building EVs in China, where many in the auto industry see a much faster adoption than in the West. Ford will build a plug-in hybrid next year and an all-electric SUV within five years.

Global renewables investment falls. Investment in renewable energy fell last year to $241.6 billion from $312.2 billion a year earlier, according to the UN. But one factor for the decline is a positive one: investment fell because renewables are becoming cheaper, allowing for more capacity to be installed per dollar invested. Despite the decline in spending, installations grew from 127.5 gigawatts to 138.5 GW.

By Tom Kool for Oilprice.com