OPEC's lower buffer may signal return of geopolitical risk premium

Geopolitical risk premium is likely to return as OPEC’s effective spare capacity will decline if Gulf producers increase output to meet supply disruptions, Arab Petroleum Investments Corporation (Apicorp) said in a recent report.

“The situation that the market has found itself in is an interesting one. It has become apparent that the market is increasingly affected by a broader range of factors, and that the US shale industry cannot rebalance the market alone," said Mustafa Ansari, senior economist, Apicorp.

"As demand growth continues to outpace supply, we could see further stock withdrawals. And with OPEC spare capacity expected to decline, especially if production cuts are eased, then the market will have a small buffer within which it can cushion itself against supply disruptions, leading to price hikes and higher volatility," he added.

According to the report, crude supply began to overtake total demand resulting in an imbalance that reached 1.5 million barrels per day (mbd) in 2015 which continued well into 2016 and 2017 – though narrowing – resulted in record levels of stock build.

The Organisation for Economic Co-operation and Development (OECD) commercial stocks increased from around 2,640 mbd in May 2014, to a peak of 3,110 mbd by July 2016. This caused prices to plunge below $30 a barrel in January 2016 as OPEC introduced new measures to rebalance the market.

“Our report shows that supply from the OPEC increased by 3.85 mbd between the second quarter of 2014 and the end of 2016, with output only falling following the OPEC+ agreement," said Ghassan Al-Akwaa, energy sector specialist,  Apicorp. 

"This can mean only one thing: the oil industry is still thriving, and this is shown through different exporting countries – like Iraq and Iran –  bouncing back from their different set of challenges stronger than any other time," he added.

Meanwhile, different oil-based economy countries from across the region looked to invest more heavily in energy sources to overcome the oversupply.

At the forefront of these investments were the UAE and Kuwait, with each of these countries announcing ambitious capacity targets for 2022, that could see them invest over $220 billion in the energy sector, it added.