IEA Frets Over Geopolitical Risk, While Markets Are Showing Tolerance

---

Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Even though most major economies are in theory pivoting away from fossil fuels, the threat from disruptions in oil supply will not fade away anytime soon, the International Energy Agency (IEA) (Paris, France) said.

Crude oil prices remain subject to geopolitical issues, from attacks by the Iranian-backed Houthi rebel group in Yemen to the war in Ukraine. On Wednesday, Ukrainian drones hit the Ryazan oil refinery, the seventh-largest in Russia, following a similar attack on a facility operated by Lukoil.

Supported by drains in crude oil inventories in the U.S. economy, the attack helped spark something of a rally for oil, with the global benchmark, Brent, flirting with $84 per barrel in early Wednesday trading.

The IEA said the world needs to transition to a cleaner future in order to avoid the worst possible impacts of climate change.

"However, while the world's dependence on oil is lessening, it remains deep-rooted, so supply disruptions can still cause significant economic harm and have a substantial negative impact on people's lives," Ronan Graham, an IEA energy security analyst, and Ilias Atigui, an energy security researcher, wrote.

Deep-rooted dependencies were put on display when Russian military forces invaded Ukraine in early 2022. At the time, Russia was one of the main suppliers of crude oil and natural gas to the European economies and the subsequent sanctions imposed by Western powers severely limited what was available on the market at the time.

That, in turn, helped pushed crude oil and natural gas prices to historic highs, eventually convincing the United States to release oil from its strategic reserves in order to offset supply-side concerns stemming from the war.

The IEA was established in the 1970s in response to the Arab oil embargo on Western powers. It's since coordinated multilateral releases from strategic stockpiles during times of geopolitical uncertainty, from civil war in Libya to the various military operations in Iraq.

Fast forward to an era where electric vehicles are taking market share away from gasoline-powered cars and trucks, and the IEA said global oil demand could peak by the end of this decade.

"However, the threat posed by oil supply disruptions will not disappear anytime soon," IEA researchers wrote. "Even once demand starts declining, oil will remain an important part of the global energy mix for some time."

Markets, meanwhile, are showing a high degree of tolerance as the second half of the year approaches. Ole Hanson, the head of commodity strategy at Saxo Bank in Denmark, said the rally that began in December when Houthi attacks on Red Sea voyages began is running out of steam.

So far, he said Brent has been unable to break through the $85 range despite ongoing geopolitical turmoil.

"While the geopolitical temperature has moved higher by a few degrees since December, we have yet to experience any disruptions, and the market has concluded that such a risk is currently very low," he wrote on Wednesday.

Without a coordinated effort to trim collective supplies by OPEC+, the core members of the Organization of the Petroleum Exporting Countries and non-member state allies such as Russia, Hanson said Brent would likely be trading in the low $70-per-barrel range "or perhaps even lower."

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).