The latest addition to my UK SIF folio was Kurdistan-focused oil producer Gulf Keystone Petroleum. As I own at least one stock with exposure to the wider Middle East region, should I be worried about the oil price spike which has followed Saturday’s drone attacks on the giant Abqaiq oil processing facility in Saudi Arabia?
There are three aspects to this issue that seem relevant to investors.
Oil Price: Despite the oil price spiking 12% higher on Monday (pm), the price of Brent Crude is still about 13% lower than it was one year ago.
In my view, the last-seen price of $67 per barrel is unlikely to be disruptive for either end users or producers. I don’t see any reason to worry about the oil price at this time.
Impact on global supply: At first glance, the impact of this disruption appears to be significant. Saudia Arabia’s oil production is said to have halved, falling from c.10m barrels per day to around 5m. That’s equivalent to a loss of about 5% of global supply.
You might think this would be likely to lead to an immediate tightening of the global oil market, with the potential for supply disruption. However, three factors appear to mitigate against this.
Firstly, some of the Saudi shutdown is said to be precautionary and may be back online relatively soon.
Secondly, stock levels are high, globally. Major markets such as China and the US have sizeable oil reserves they can release to support supply, if needed. Saudi Arabia says that it will use its oil inventories to maintain customer supplies.
Finally, before last weekend’s events, the market was generally seen as well supplied. Less than a week ago, the US International Energy Agency (IEA) was forecasting (FT paywall) a surplus of 1.4m barrels a day next year, if Opec production remained stable.
Based on what we know at this time, my view is that the impact on global supply will be manageable.
Geopolitical risk: I believe this is where the real risks lie. Will conflicts in this region escalate?
Subscriber rhomboid1 left a potentially prophetic comment on my piece last week, highlighting the geopolitical risks of investing in this region. My response was essentially that although this region has been famously unstable, oil exports have tended to prevail.
For now, Kurdistan…
