Economics Blog

Just like last week, the talk of the town remains oil prices. While prices did fall about $10 in 2 days to even $130/bbl, on Thursday they decided that they had enough of being in the $130s and missed being in the limelight of $140s…so off they went…and what was the news? Well, of course, our old friend Iran and Israel were of course involved…lets say, less Israel this time, but more Iran and the US. Then we had Nigeria and finally the icing on the cake was provided by Brazilian union workers.

Iran apparently test-fired two rounds of missiles, including one which could reach Israel. The debate, interestingly, surrounded whether the missiles were fired on Wednesday (according to the US) or Thursday (according to Iranian media). Well, irrespective of when they were fired, missles were fired and that’s what’s important. Perhaps Iran is doing the right thing by sending signals about their strength, and thus avoiding being attacked. Whatever the politics behind this is, it is working to add jitters to the oil market. Then there were rumours that Israel performed air force drills - rumours that were denied by Iraqi intelligence. The market has added about say at least a $15 premium for geopolitical issues at the moment, and unless a statement is issued saying that a complete resolution to this matter has been achieved, this premium is likely to stay…the exact amount will probably be determined everyday depending on the level of rhetoric between the 3 playes (Iran, Israel and US).

The Nigeria situation is an ongoing one as well…with both Shell and Chevron being badly hit recently. The output from this OPEC member state has been lower for the last 2-3 months - around the region of 1.8-1.9 million barrels per day (mbpd) - than usual due to the militant attacks, and thus, Saudi Arabia’s attempts to pump some more fuel in the world economy to ease supply worries will get a lot more quickly absorbed than they probably expect, as it will end up compensating for falling output elsewhere. Lately, MEND has ended all unilateral ceasefire starting today on comments by UK’s prime minister pledging support to help solve lawlessness in the region. MEND has warned that UK is supporting an illegal government and hence justified their decision. This does not bode well for the oil companies based in this region, as more militant attacks are likely to result in more force majeures being called.

Now, over the Atlantic Ocean to Brazil, and here we have Petrobras’s unions threatening to strike starting Monday. The Campos basin, where the strike is supposed to take place, accounts for 80% of Brazil’s 1.8mbpd oil output. The strike concerns counting the day workers leave for the rig as a working day, and despite Petrobras being willing to negotiate, the strike is expected to continue. Separately another union has threatened to strike at all Petrobras’s refineries due to pay disputes.

So, what we have here is supply disruptions across the world, and threats of even more likely to emerge. In a situation like this, (and with China’s Olympics coming soon, oil demand is unlikely to go down from this country!), OPEC will have to step up and expand output. If not, I pray for a miracle to emerge, in this life or next, for if not, I don’t even know where prices will stop!