Sector News Flash:
Regional Oil & Gas (Overweight)
Keep a Vigilant Eye On Middle East Tensions
Regional Oil & Gas (Overweight)
Keep a Vigilant Eye On Middle East Tensions
New
sanctions that the US imposed against Iran are limited in scope and target
specific individuals and entities. We believe the sanctions do notaffect the
nuclear deal that the six world powers and Iran agreed to last year. This
therefore does not affect Iran’s oil production and exports at the moment.
However, heightened tension and any threats of confrontation in the Strait of
Hormuz could place a premium on crude oil prices. In addition, OPEC &
non-OPEC’s production-cut deal may see historic high compliance levels. We
maintain our OVERWEIGHT stance on the oil & gas sector.
¨ New sanctions against
Iran are limited in scope.The US added new sanctions on Iran’s weapons procurement
network last Friday. The US Treasury Department published a list of 13 individuals
and 12 entities that would face new restrictions for supporting the missile
programme, having links to terrorism or providing support for Iran’s hard-line
Islamic Revolutionary Guard Corps. The immediate trigger for these sanctions
was Iran’s ballistic missile test last Sunday, that US believes that one
daywould be capable of carrying a nuclear warhead.
¨ These new sanctions
do not currently affect the nuclear deal that had been agreed to by Iran and the six
world powers –UK, China, France, Germany, Russia and the US. This particular
deal obliged Iran to curtail its nuclear weapons research in exchange for
relief from the US and international sanctions. Under the UN resolution passed,
the nuclear deal calls upon Iran not to undertake any activity related to
ballistic missiles designed to be capable of delivering nuclear weapons,
including launches using such ballistic missile technology.
¨ Impact on oil
markets.New
sanctions that the US imposed against Iran are limited in scope in our view, and
target specific individuals and entities. This therefore does not affect Iran’s
current oil production and exports. However, heightened tension and any threats
of confrontation in the Strait of Hormuz can put a premium on crude oil prices,
as the strait represents one of the world’s most important oil chokepoints,
with c.20% of the world’s crude oil passing through each day. Under current
circumstances, we do not expect any significant actions to be taken at the
moment. However, should political tension escalate from here, the possibility
of significant actions by either side cannot be ruled out.
¨ Historical deal to be
followed by historical compliance rate.When the world doubted that theOrganisation
of Petroleum Exporting Countries (OPEC) deal was possible, we highlighted that
it was in OPEC’s best interest to arrive at a deal to cut production. A
historic OPEC and non-OPEC deal was made to cut 1.8mbpd in Dec 2016. When the
world doubted OPEC’s compliance to a production cut (where historic compliance rate
was 30%), we indicated that it would be OPEC’s credibility at stake and we
would give it the benefit of doubt that the organisation would comply. We are
now looking at a historic compliance rate of 60-80%. Over the next six months,
production cutswould be officially announced on the 17thday of each
month by OPEC.
¨ Other supplies to enter.We are expecting
around 300,000bpd of shale oil to enter in 2017, but this could be as high as
800,000bpd, depending on where crude oil prices are. Libya and Nigeria are
exempt from the production cuts, therefore around 0.8mbpd could also be added
to the supply over the next 12 months, should they be able to attain political
stability. Hence, crude oil price is the major determining factor for US shale
oil supply to enter the market, while politics is the major factor triggering
supplies in Libya and Nigeria.
Kindly click the following link for the full report: Keep a Vigilant Eye On Middle East Tensions
Kannika Siamwalla,
CFA
Head of Regional Oil
& Gas
RHB Securities
(Thailand) PCL.
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