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Middle East, Sudan Turmoil Cuts Into World Oil Supply

A general view shows pipelines at the Zueitina oil terminal in Zueitina, about 120 km (75 miles) west of Benghazi, Libya, July 18, 2013.
A general view shows pipelines at the Zueitina oil terminal in Zueitina, about 120 km (75 miles) west of Benghazi, Libya, July 18, 2013.
Reuters
The fall of Middle East tyrannies and renewed conflict there have squeezed the oil supply, returning the region's politics to the fore as an energy worry for the world.

Oil outages in Iraq, South Sudan, Libya and Iran are combining to help keep oil prices well above $100 a barrel, partly countering the rise in U.S. shale oil supply and concern about the strength of Chinese demand.

“Geopolitics are firmly back on the radar,” said Soozhana Choi, analyst at Deutsche Bank. “This is occurring against a backdrop of North Sea field maintenance and strong refinery demand for crude oil.”

Disruptions in the Middle East and North Africa arise as supply from the North Sea is undergoing a heavier-than-usual spell of summer maintenance, and as the flow of Russian Urals crude to Europe has fallen, with more heading to China, further tightening supply at a time of higher seasonal demand for crude.

Supply losses are more than 700,000 barrels per day (bpd) according to Reuters calculations and industry sources, and could reach 1 million bpd - 1.1 percent of world output - if South Sudan goes ahead with a threatened shutdown of its production.

“Production is currently underperforming and significantly so,” said David Hufton of oil brokers PVM. “Being an oil bear is a tough existence in the short-term trading world.”

The supply losses are boosting prices. Benchmark Brent crude futures traded just above $107 a barrel on Tuesday, up from its 2013 low of $96.75 reached in April.

The first-month Brent contract is trading 85 cents above the second month, up from 51 cents on July 1, showing a rising price of oil for immediate delivery.

Libya, Iraq production

Libya's production recovered rapidly after being virtually shut down during the 2011 revolution. It has struggled to maintain output near its normal rate, though, due to worker protests at oilfields and terminals.

Output is about 1.25 million bpd, down 150,000 bpd from a year ago, according to industry sources. Workers at Libya's largest oil refinery, Ras Lanuf, have gone on strike, said shipping and trading sources on Tuesday.

Iraq, last year the world's fastest-growing oil exporter, has failed to grow its output so far in 2013. Iraq's Sunni insurgents are targeting its northern pipeline, while technical problems in the south also have weighed on supply.

Oil exports from Iraq have averaged about 2.25 million bpd so far in July, according to oil shipping figures monitored by Reuters, down 270,000 bpd from shipments of 2.52 million bpd in July 2012.

OPEC member Iraq's faltering progress has easing pressure on Saudi Arabia and other Gulf members of the Organization of the Petroleum Exporting Countries to make big cuts in output to prop up prices, according to sources in the group.

A further OPEC producer, Iran, also is struggling. U.S. and European sanctions over its nuclear program are keeping its oil output down to about 2.6 million bpd, well below its potential. Iran produced 2.9 million bpd in July 2012, according to the International Energy Agency.

Iranian exports, at about 1.1 million bpd, are about half of their level in early 2012.

And a row between Sudan and South Sudan over allegations of rebel support is threatening to close pipelines carrying South Sudan's oil, taking outages from the four countries toward 1 million bpd.

South Sudan has started to close some of its production, which most recently was estimated at 180,000 bpd. Sudan last week postponed the shutdown of the pipelines for two weeks, however, to allow more time to end the dispute.

“It lends underlying support,” said Carsten Fritsch, analyst at Commerzbank in Frankfurt, of the various outages, although concern about South Sudan has eased. “The situation in South Sudan improved somewhat. So it is not yet clear if they will really shut down production.”

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