Risk premium for oil markets to return in 2017 as middle East instability persists – IHS

For next American president, no foreign policy choice more important ending Middle East stalemate

Amb. Carlos Pascual, IHS senior vice president. (Photo: Business Wire)

Amb. Carlos Pascual, IHS senior vice president. (Photo: Business Wire)

ENGLEWOOD, Colo. – Shifting power relationships in the Middle East are reordering regional geopolitics, entrenching a stalemate of conflict that threatens to further destabilize the region.

Wars in Syria and Yemen and against the Islamic State, combined with the balancing of supply and demand in oil markets later this year, will likely return a risk premium to oil prices in 2017, says a new special report by consultancy IHS.

“For the next US president, no foreign policy choice will be more important than deciding whether and how to end this reordered stalemate of conflict,” said Carlos Pascual, senior vice president, IHS Energy.

Ambassador Pascual, who authored the report, previously served as US Energy Envoy and head of the Energy Resources Bureau in the Department of State. He is a former Ambassador to Mexico and Ukraine.

A global oversupply of 1-1.5 million barrels per day throughout 2015 negated the market impact of political risk. Oil prices did not rise despite Islamic State attacks in Paris, Egypt, Turkey, the United States and Belgium, for instance.

“Middle East instability drives international terrorism, the flow of refugees and adds a risk premium to the price of oil,” said Pascual.

However, with global oil demand growth expected to catch up with or outstrip supply, especially if disruptions continue, over the next six to 12 months, a risk premium could well return as a factor on the price of oil, the report says.

“Despite a US election campaign that projects the country turning inward, giving a blind eye to the region’s deteriorating realities will ensure that the stalemate of conflict grinds forward and that the United States loses influence and credibility in addressing threats that have already touched us at home,” Pascual said.

The degree by which the new risk premium impacts price will depend on developments in the Middle East as well as other key producing areas displaying potential for supply disruption, such as Venezuela and Nigeria.

The report details a number of developments that are simultaneously reordering the regional stalemate while preserving the state of persistent conflict and instability.

Highlights:

  • Russia is reengaged and once again a regional player in the Middle East
    Russia’s partial withdrawal of troops from Syria, after forcing a cease-fire that cemented Russian-driven territorial gains for Syrian president Bashar al-Assad, left Russian president Vladimir Putin tactically triumphant—regionally, globally and at home.
  • Iran entrenches further
    Iran needs Assad in power, even if Russia supports his orderly transition. Iran will seek to establish an even stronger presence in Syria and Iraq and against the Islamic State. But in practice, neither Russia nor Iran is playing for a solution to the region’s conflicts. Each seeks tactical advantage in a regional power play. As neither will really win or lose against the other, we don’t expect a Russian-Iranian confrontation. Indeed, with the lifting of sanctions, Russia has gained an Iranian client eager to expand purchases of arms, technology, and perhaps energy services, as well as investment.
  • Iraq frays further
    Low oil prices have put Iraq into an enormous fiscal crisis, which is forcing Baghdad to seek economic and governance reforms that reduce transfers to regional provinces. Reform has become synonymous with imposed austerity on Iraq’s provinces. For now, the imperative to fight the Islamic State and the need for some central military authority may defer a faster descent to looser federalization. Eventually, Iraq will need to build a new consensus on governance or break…. If Iraq can hold itself together, given its deplorable budgetary problem, it will win the most immediate existential benefit [from higher oil prices].
  • Whither the United States?
    The Iran agreement required a singular U.S. focus, but it may have distracted U.S. attention both from Syria’s further descent into conflict and chaos and from the Islamic State entrenching its foothold in the region. In visiting Saudi Arabia in April, Obama faced an uphill struggle before he even got off the plane, owing to a number of factors: perceived indecisiveness in Syria, finding common ground on Iran, umbrage over his public comments that the Gulf states had not pulled their weight in the region—all against the backdrop of a U.S. Congress seeking legislation to allow Saudi Arabia to be sued in U.S. courts.
  • A redrawn stalemate
    For now, Russia is reengaged and once again a regional player; U.S. credibility has diminished even if it has not been dismissed; Iran will seek to entrench further in Syria to protect Assad; the Sunni states might welcome new allies with firmer resolve against Assad; and the Syrian opposition is in disarray. Little in this mix creates a foundation for stability that can underpin a political transition in Syria and the military capacity to enforce any agreement reached. The region will grind  forward in this reordered stalemate.

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