In recent weeks, the Middle East has become the focus of international attention due to Hamas’ terrorist attacks on Israel, causing a major conflict with a potential impact on important players in the world oil market.
While any war in the Middle East is a potential threat to the security of oil supplies, a war involving a producer the size of Iran and/or Persian Gulf countries could have even deeper implications for the global oil market. Of course, none of these implications are positive.
In fact, the sector may face a significant supply risk depending on the escalation of conflicts. However, at least for now, due to recent cuts in production to maintain oil prices at levels desirable by OPEC+ (Organization of Petroleum Exporting Countries and allies led by Russia) – in the range of US$ 80 to US$ 90 – The group’s main producers appear to be better equipped to withstand the shock compared to previous crises.
Therefore, after reducing oil production to support prices, Saudi Arabia and its OPEC+ allies have a high technical reserve of oil production capacity. According to the EIA (US Energy Information Administration), it is the largest idle capacity in more than a decade, estimated at around 4 MM bpd (million barrels per day), that is, approximately 4% of global supply.
Therefore, OPEC+ countries seek to keep oil production below global consumption. With this, they hope to obtain upward pressure on prices, with the objective of increasing the average to around US$95 per barrel in 2024. That said, it is important to consider that the war can significantly alter supply conditions depending on the extent and duration of the conflict – everything indicates that it will remain intense and possibly worsen depending on the involvement of other countries.
At the moment, the main point to observe is whether Iran will get involved directly or indirectly, especially given that the country has control of the so-called Strait of Hormuz, which, daily, drains around 17 MM bpd, which represents 17% of global demand (OPEC 2023 projection: 102 MM bpd) and around 90% of Middle Eastern oil transits the Persian Gulf.
Another important development that could influence supply in the medium/long term is that the US lifted most sanctions on Venezuela’s energy sector for six months, thus opening the way for additional exports of heavy crude oil that the country produces. However, in the short term, due to years of underinvestment and mismanagement of the sector in the country, the growth of crude oil production should be limited to less than 200,000 barrels per day (mbd) by the end of 2024, requiring more time and investment for additional growth in supply.
US crude oil imports from Venezuela stopped shortly after January 2019, when the United States imposed sanctions on state oil company Petróleos de Venezuela SA (PdVSA). The US eased those sanctions late last year, providing exemptions to Chevron so it could resume exporting crude oil from its joint venture operations in Venezuela to US Gulf Coast refineries, which restarted in early 2023. .
In this context, the global oil market is expected to remain extremely tense, and even more uncertain due to the conflicts in the Middle East. Saudi Arabia is expected to meet the reduced production quotas it agreed with its OPEC+ partners at least until the end of the first quarter of 2024. Therefore, it is unlikely that OPEC+ will increase production sharply during the remainder of the year. Furthermore, the market expects to reach a historic production level, estimated at 102 million barrels/day in 2023, and global oil demand is expected to increase by around another 1.3 million barrels/day in 2024.
The world was already facing a major energy crisis, especially due to the war between Russia and Ukraine, challenges in controlling inflation and high post-pandemic energy prices with relevant repercussions on countries’ energy security and transition. And, to make things even worse, the war is emerging in the Middle East, which is limited to Israel, the Gaza Strip and southern Lebanon, with no direct impact on the oil supply. However, there may be greater amplitude in the region, significantly affecting the energy market in the world.
Therefore, at least for now, the sector’s main information agencies expect oil prices to remain in the range of US$80-100/barrel with high volatility. However, if the Israel-Hamas war turns into a regional conflict and/or threatens the flow of oil through the Persian Gulf, the market will face a much more difficult journey, with a lot of volatility and a sharp rise in prices.
In the midst of so many external adversities, Brazil finds itself in a favorable position to face the challenges of the moment. First, because it is far from the conflict region; second, for being a growing oil exporter with great potential to be among the five largest producers by 2030.
Added to this, the country has a huge diversity of renewable energy sources and an abundance of natural resources. In this way, Brazil brings together many elements that provide greater resilience in relation to the impacts resulting from wars in Europe and the Middle East in the medium/long term and, more importantly, can contribute to alleviating the effects of the energy crisis in the world.
However, in the short term, especially in the event of an escalation in conflicts, Brazil, as a net importer of derivatives (mainly diesel, gasoline, naphtha, QAV and LPG), may suffer adverse and undesirable effects, the result of a large rising oil prices.
The moment requires caution and urges a broader understanding of the effects of the crisis, with the imminent need to establish a national contingency plan, avoiding potential discontinuity in fuel supply and mitigating the effects of variations in prices for the productive sector and for the society. The big question is: are we prepared? The government, regulatory agencies and Petrobras need to take the lead to guarantee national supply, thus expanding energy security in the country.
*Former director of ANP – National Petroleum Agency and Managing Partner at FK Energy Partners
