If last year was the year of gold, this year is certainly shaping up to be the year of oil. Earlier in the year the US invaded Venezuela, which is reported to have the largest oil reserves in the world.
Not long after, the US-Iran war ensued, sending global oil markets into a frenzy. The Strait of Hormuz, which normally sees 20%-30% of global oil supply passing through it, was shut down. Subsequently, energy infrastructure and reserves have been attacked on both sides, and Iran has attempted to reshape the structure of the strait much closer to its harbours.
The price of Brent crude has soared close to 100%, oscillating around $100/barrel at present amid the ceasefire/close-strait negotiations between the US and Iran.
To add to the uncertainty, on April 28 the United Arab Emirates (UAE) announced its intention to exit Opec on May 1. This, of course, weakens an already weakened Opec and reduces the economic influence Saudi Arabia, as the organisation’s leader, has on the globe.
The UAE contributes about 10% to Opec production, and Iran about 14%. Depending on how the war in Iran settles, it may well be that Iran follows the UAE’s precedent and exits Opec. This would imply a 25% loss of control by Opec. Countries such as Russia could follow suit, which would be a total loss of control of 45% of production capacity.
Overall, this is a positive for markets, as less synchronised production by Opec implies countries can more independently produce more oil according to their own fiscal requirements, which would, all things being equal, increase global supply.
It makes price stability harder to achieve by Opec, with the other oil-producing nations benefiting and, in effect, diluting any efforts Opec makes to increase and stabilise global oil prices by controlling supply. However, it does further fragment the geopolitical landscape.
To make matters worse, the US, which contributes in excess of 15% of global oil production and typically consumes most of it, has increased how much it exports, albeit temporarily.
On the African continent, Nigeria, which contributes close to 7% of Opec production, faced a double-edged sword when global oil prices rallied: on the one hand, better fiscal revenue as a net exporter of raw Brent crude, and on the other fiscal pressure from petroleum subsidies and the costs of importing refined petroleum.
The problem is worsened by fiscal leakages in the system. The import problem is being partially solved by the Dangote Refinery, which now supplies more than half of the domestic demand. This has seen imports falling in excess of 80%.
Coming back home, there are questions about South Africa’s own energy security. We import the bulk of our oil from the Middle East, namely Oman, Saudi Arabia and the UAE. We have recently increased our supply from the US to plug the shortfall from the strait blockage, but this is likely temporary. A potential strategic shift for South Africa includes investing in Nigerian oil exploration and refinery to secure oil for domestic use.
From an economic perspective the current events, though largely seen as transitory, are reshaping global oil markets. Interest rate cuts have almost in their entirety been wiped off the table, with the potential of hikes if global oil prices remain at current levels for an extended period.
With South Africa starting off in better fiscal and monetary policy standing this time around than we were during the Russia-Ukraine crises, we have seen fiscal support in the form of reduced fuel levies on a temporary basis to absorb the price shock.
Our markets have remained resilient, moving sideways during the course of the year, with high dividend payout ratios from retained earnings cushioning drawdowns.
Despite the moderate pullback in the gold price, which was already elevated, gold miners are well positioned, with much lower cost curves than where current prices are. We have, naturally, seen some sector rotation playing out from gold counters to energy counters on local markets.
• Smith is chief investment officer at Absa Investments.
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