You can’t tell from the price action, but there’s plenty happening around the Middle Eastern oil industry right now.
Take the figures in the latest World Energy Outlook report from the International Energy Agency. It implies you can forget US shale oil, offshore West Africa and Brazil, because it says the key oil supplier for the next twenty years is smack bang in the Middle East: Iraq.
According to the report, Iraq is already back to the world’s third largest oil exporter (after Saudi Arabia and Russia), despite problems with its infrastructure and power supply.
Iraq has huge potential reserves in unexplored parts of the country and costs much less to produce in than other alternatives like, for example, Alberta oil sands.
The IEA contrasted three potential scenarios, and said, ‘The increase in Iraq’s oil production in the Central Scenario of more than 5 mb/d over the period to 2035 makes Iraq by far the largest contributor to global supply growth.’
The Wall Street Journal reported that Iraq’s output topped three million barrels a day for the first time since 2000.
But like we said, Iraq is smack bang in the Middle East. Syria, Iran and Saudi Arabia border it.
That might be the problem…
Cyber Warfare in the Middle East
You’d think there was enough uncertainty in the oil market right now without throwing cyber warfare into the mix as well.
The Financial Times reported this week that, ‘a flurry of recent cyber attacks have raised fears about the growing use of viruses to target critical national infrastructure in the Middle East.’
This follows recent news that a computer virus known as Shamoon hit Saudi Arabia’s Aramco, the world’s biggest oil company, in August. Apparently, it took Aramco two weeks to restore the damaged part of its network. Fortunately, no oil production was lost. This time, at least.
And the US didn’t miss the opportunity to suggest that Iran might be behind the same virus that also struck Rasgas, a Qatari natural gas company.
According to this, from an AFP article:
‘the threat that digital attacks could cripple vital infrastructure is real, with [US Defense Secretary Leon] Panetta warning of the possibility of a “cyber-Pearl Harbor” to justify a policy of moving aggressively against threats. A disruption to Saudi Arabia’s oil exports could cause oil prices to spike from their already elevated prices and tip the fragile global economy into recession.’
If cyber warfare wasn’t enough, on Tuesday, Iran again threatened to halt its oil exports if the US and EU impose more sanctions. The oil market didn’t seem to give this threat much chop, with a barrel of Brent crude still selling for under US$110 and actually continuing its downward trend since last month.
Could Iran survive without exporting oil? For a while, maybe.
The US estimates that 80% of Iran’s exports are petroleum, but it has a reported $100 billion in foreign exchange reserves.
The way the Iranian currency (the rial), is going, Iran will need them. According to Wikipedia, the rial is currently the least valued currency unit in the world, after the sanctions caused its value to collapse.
There’s more to this story though.
The Unintentional Boom in Istanbul
The sanctions on Iran are causing a boom for Turkish gold merchants.
Reuters revealed this week that because of Iran’s suspension from the international banking system, a new trade route from Istanbul to Dubai to Iran has sprung up.
The path goes something like this: Iran sells oil and gas to Turkey and is paid in Turkish lira. That lira is then spent in Turkey buying gold. Turkish couriers take it to Dubai. From there it gets to Iran, even if nobody seems sure how exactly it makes the last leg of the trip.
All this is legal, of course, although the stop off in Dubai is supposedly merely to deflect attention away from the fact that it’s Iran doing the buying.
According to the Reuters report: ‘The sums involved are enormous. Official Turkish trade data suggests nearly $2 billion worth of gold was sent to Dubai on behalf of Iranian buyers in August.’
You’d think this kind of ‘shadow banking’ at least gives some credence to Iran’s threat that it can hold out longer than expected from Western pressure through a combination of its energy exports and foreign exchange reserves.
All this is happening amongst constant aggressive rhetoric from Israel and US about mobilising against Iran, the civil war in Syria and wider unrest across the Middle East.
It doesn’t look like any of this is going to end anytime soon. We expect more turmoil in the Middle East.
Our colleague Dan Denning’s working strategy is that the continual risk of a flare up in the Middle East puts a premium on energy assets outside of the region.
And if he’s right that the Aussie mining boom is over in coal and iron ore, energy might be the one commodity sector to back in 2013 and beyond…despite current good news from Iraq and the oil price’s current dip.
Co-Editor, Scoops Lane
The Most Important Story This Week…
Our in-house trader Murray Dawes says the stock market has three intertwining trends — short, intermediate and long. Tracking these daily is part of his analysis. Right now he says the intermediate trend is up.
The problem is this can lure inexperienced traders into misinterpreting the signal and get sucked into buying at the wrong time. How should you approach the market? Read Murray’s analysis in The Big Fall in the Stock Market I’ve Been Waiting for is Still to Come
Highlights in Money Morning This Week…
Kris Sayce on Why a Return to the Gold Standard Could Actually Be Bad: ‘History tells you that gold and silver have been the money of choice for thousands of years. But history tells you something else. And this is the thing many gold investors don’t talk about. History tells you that governments will always try to fiddle with the money supply in order to pay for votes and wars.’
Murray Dawes on The Big Fall in the Stock Market I’ve Been Waiting for is Still to Come: ‘When a stock market trades above a previous high it will often look like a breakout to novice stock traders…The stock market will spike higher and for a few weeks can look fantastic. But then the music stops and suddenly the stock market plunges lower.’
Merryn Somerset-Webb Agricultural Commodities – The Best Way to Play Rising Food Prices: ‘Desertification and urbanisation are cutting into current land supplies; biofuels are interrupting the supply chain; and season of nasty drought is reminding us that agriculture consumes 70% of the world’s water.’
Nick Hubble on A Safer Than Super Investment?: ‘Yesterday we told you about one of our upcoming reports. It’s about a way to keep your savings safe from falling asset prices, like a stock market crash. But the real twist on this alternative safe and boring asset is that it’s about to get a whole lot less boring.’
Powered By DT Author Box
Written by Callum Newman
Callum Newman is editor of the Money Morning weekend edition and co-editor of Port Phillip Publishing’s subscribers-only email Scoops Lane. (To have Money Morning delivered straight to your inbox you can subscribe for free here).
If you’re already a subscriber to these publications, or want to follow Callum’s financial world view more closely, then we recommend you join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.