The push and pull between geopolitical woes and the rebalancing of global supply means oil’s bull market rally is facing a tough October.
The price of brent crude slid on Tuesday after its biggest monthly gain in more than a year and touched a two-year closing high of $US59.02 a barrel on 25 September.
Brent crude was fetching $US55.95 a barrel on Tuesday, while West Texas Intermediate was trading at $US50.45 a barrel.
“Oil prices have performed well over the last month, so we’re seeing a fair bit of profit-taking now,” says Nik Burns, commodity analyst at UBS.
“But there are a host of geopolitical problems, from the Kurds upset in Iraq, to whether the US will scrap the Iranian nuclear deal or if Venezuela can afford its debt bill…it’s difficult to know which event the market will focus on.”
Oil’s steady recovery over the last month has been largely thanks to a rebalancing of supply from the Organisation of Petroleum Exporting Countries (OPEC) and allies such as Russia.
During September, OPEC as a whole added 120,000 barrels a day, not a destabilising amount, led by increases from the Saudi kingdom, Kuwait, Libya and Nigeria, according to a Bloomberg News survey.
“We are seeing a normalisation of global inventory, it’s mostly falling, which is supporting prices,” says Mr Burns.
Currently, the global market is oversupplied by about 2 million barrels of oil a day.
Kurdistan and Iraq’s oil battle
Investors are currently carefully watching the fallout of the Kurdish independence referendum.
Last week, Iraq’s Kurdish population voted overwhelmingly to establish an independent state, the capital of which is Erbil.
This has increased fears about oil export disruption, given Kurdistan currently controls Iraq’s major oil company and there is fierce infighting over who controls which oil fields.
In a bid to quash the independent aspirations of the Kurds, the Turkish government has threatened to close the Iraq-Turkey Pipeline, cutting off roughly 600 barrels per day of supply and the main route for Kurdish crude oil.
However, as RBC Capital Markets points out, Russia’s increasing involvement in Iraqi energy affairs may cause Turkey’s President Erdogan to pause.
“If Erdogan made good on his threat to turn off the taps, he could find himself not only squaring off with Kurdish President Masoud Barzani but also against Russian President Vladimir Putin,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
“[But] We would highlight the risk in a scenario that a more serious standoff occurs over control over the oil fields in the disputed areas that are claimed by both Baghdad and Erbil.”
Iran and Trump
Iranian oil supply is also weighing on global sentiment, as US President Donald Trump teeters on the edge of rejecting Iran’s compliance to the 2015 Join Comprehensive Plan of Action.
The deal, which saw sanctions against Iran’s oil exports lifted in exchange for a wind-down of the country’s nuclear program, requires the United States to certify it has complied with requirements of the deal.
President Trump is set to make his third decision on Iranian compliance on October 15, which he indicated in his UN General Assembly Speech he was reluctant to certify saying “it is the wrong thing…they don’t comply”.
Oil markets might interpret Trump’s move to scrap the nuclear deal as bullish for oil, but Iran shrugged off hypothetical attempts to restrain its oil exports stating it would continue to keep exporting to international customers.
Iran exports 2.6 million barrels per day of crude oil and the more valuable condensate.
Venezuelan bedfellow: Russia
Venezuelan oil might also evaporate from global supply if the White House continues to place economic pressure on the the Maduro government.
Oil accounts for about 95 per cent of Venezuela’s export revenues, which are under serious threat as furious divisions in the South American country spread.
“The rollout of new US sanctions could coincide with a possible debt crisis that could prove calamitous for oil production,” says Ms Croft.
Venezueala’s major oil company, PDVSA, is up against a steep $US3.5 billion debt deadline this October and investors are wary of its capacity to pay it.
The possibility of Russia extending a loan facility to the troubled oil producer – again – has kept oil price movements in check, but as geopolitics emerges again as the primary driver of oil price fluctuations, October has a lot of moving parts.