As the price of oil continues to hover around the $60 mark, two looming threats could have a significant impact on upcoming price dynamics. Savvy traders and investors should be keeping an eye on:
1. Mexico's Presidential Election
In 2014, the Mexican government (under president Enrique Peña Nieto) approved plans to privatize some of Mexico’s long-nationalized oil industry. The rationale was that investment from private sources would help revitalize a Mexican energy industry suffering from corruption, infrastructure problems, declining production and mismanagement. In 2015, the Mexican government auctioned off licenses for offshore exploration and production in the Gulf of Mexico. Mexico was disappointed with the results, and its timing was especially poor. The downturn in oil prices caused many companies to cut their exploration and production budgets.
Now, it appears that even the oil contracts already signed with foreign companies are in jeopardy. Mexico is in the midst of a presidential election and two of the most popular candidates are leftists. The current leader in the polls has already committed to reviewing these contracts if elected and wants to put the issue up for a referendum. If this happens, it is likely that Mexico’s move towards oil liberalization will cease, as polls have long showed that a majority of the Mexican population (65%) does not support Peña Nieto’s oil liberalization policies.
Investors should keep a close eye on the Mexican political situation and the upcoming election, which takes place on Sunday July 1, because if Mexican oil production does not obtain outside investment, production will continue to drop.
2. Turkey, Kurdish Oil and Iraq
For quite some time now, Turkey has been arranging for the transportation and sale of Kurdish oil from its Ceyhan port. Although the Kurds and the Turks share a long history of political conflict and do not seem like natural business partners, the relationship has been stable and mutually profitable. Since the Iraqi government in Baghdad regained control over the city of Kirkuk and its nearby oil fields, it has sought to halt the sale of Kurdish oil (some of which comes from Kirkuk) through the Ceyhan port.
It seems that now Iraq is taking the matter directly to the Turkish government. Iraqi oil minister Jabar al-Luaibi will visit Turkey at the end of this week to discuss the issue. Iraq wants Turkey to agree to halt the transportation of any oil from Iraq that is not contracted through Iraq’s state oil marketing arm, SOMO.
Investors should note that, according to TankerTrackers.com, the primary customers of oil from the Kurdistan Regional Government (KRG) are Greece, Israel, Croatia, Poland and Italy. The Iraqi government, however, has made arrangements to sell oil from the Kirkuk region to Iran instead. Turkey has enjoyed the economic benefits of transporting and selling KRG oil so the Iraqi government may have to offer Turkey a better deal to persuade Turkey to stop working with the KRG. On the other hand, Iraqi political pressure may be enough to convince Turkey to end its business relationship with the Kurds. If so, the KRG would be severely harmed. Moreover Greece, Israel, Croatia, Poland and Italy would need to find oil elsewhere—perhaps from Russia? Or the U.S.?