Why oil prices have defied geopolitics

Crude oil prices have continued to defy negative global supply/demand influences to remain at a persistently low price of around $60 per barrel. Low is here relative when compared with above $100 prices that prevailed prior to 2014.

The two geopolitical factors that should have significantly impacted prices are the ongoing Iranian sanctions by the US, and the US/China trade disharmony - both prompted by President Trump of US.

The Iranian sanctions have actually reduced oil supply and should ideally have pushed prices upwards, while the trade wars should be reducing global demand and suppressing prices.

However, it is the rising US shale oil production that has the most significant impact on supply and prices. The shale oil has made up for all the other global supply shortfalls including Iranian sanctions and production controls by Opec members.

This has created a situation of perpetual global oil over-supply which together with reduced demands due to US/China trade wars has kept prices low. And the shale effect is likely to prevail for some time to come.

Thanks to shale oil, US is now the number one world oil producer at about 12.3 million barrels per day (mbpd) overtaking Russia at about 11.0 mbpd, and Saudi Arabia at 10.0 mbpd. US has become a net exporter of crude oil and a major influence on balancing global oil supply ( and prices), a role previously played by the Organisation of Petroleum Exporting Countries (Opec) .

The Iranian sanctions which have in the past few months dominated global and Middle East politics appear to have lost momentum. The US may have concluded that it is a no-win game with more political and military risks than rewards. And the same fatigue seems to be affecting the US/China tariff wars whose expected long term impacts are reduced global economic growth and oil demands.

At $60 crude oil price, appetite for new oil and gas investments is significantly subdued. Many of the oil and gas projects in East African were committed when oil was above $100 which promised attractive returns. There are those investors who have irreversibly committed huge amounts of capital and are determined to push for early project completion to recoup costs while waiting for the next round of higher oil prices.

There are also those investors who consider economic yields at $60 to be marginal and are either pulling out or selling their assets.

For those determined to walk the course to project completion, it is the country-related hurdles that may be standing in their efforts and plans for early project completion.

And these hurdles may have made the Kenya, Uganda and Tanzania to take inordinately longer periods from discovery to “first commercial oil” production and export - and here I am not talking about “early oil” which is a very different narrative.

By the time each of the three EA countries exports their first oil (or gas in case of Tanzania) it will be over ten years since first commercial discoveries. It has been missed “first oil” deadline after another, caused mainly by government delays, and also by genuine government/investor disputes.

Last week Uganda got itself in such a delay-causing situation. Tullow cannot agree with the Uganda government how much (if any) capital gains tax it should pay on account of its sale of shareholding to its joint venture partners (Total, CNOOC) from 33.3 percent to 11.7 percent.

This dispute will definitely delay final investment decisions for crude oil production, pipeline and refinery.

Uganda discovered their oil 13 years ago in 2006, and at this rate it will be no earlier than 2024 (or later) when they export first oil.

Kenya now expects to export its first commercial oil in 2024 which is 12 years since the 2012 discovery, and this is an unnecessarily long journey. Tanzania Liquefied Natural Gas (LNG) projects have similar stories of missed completion and export targets.

Back to prevailing global oil prices, there is currently a lull in oil prices expected to prevail at $60 per barrel, and this is good for consumers, but not very exciting for investors