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Economy

What Does the Taliban Rise Mean for Oil Markets?

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Jaw-dropping, mind-blowing, gut-wrenching and the whole caboodle would not be enough to describe the turning of events that helped the Taliban phoenix. In the last three weeks of August 2021, the Islamist forces seized power over the Afghan capital, Kabul, following US President Joe Biden’s order to withdraw the US military troops deployed in the Central Asian country to end terrorism in reaction to the September 11 attacks of 2001.

The nearly 20-year war fought by the Americans to rebuild the resource-abundant country left it eventually to Taliban will. The blitzing Taliban campaign may have taken many by surprise but not Iran. 

Over the past year, Iranian leaders have kept open communication with the Taliban, envisioning an upcoming US withdrawal. In August, they showed interest in striking an agreement with the Taliban, yet no clear political protocols have been concluded. For the time being, Tehran’s biggest concern remains the affluent wave of refugees, weapon and drug smuggling, which Afghanistan is notorious for.

Oil power runs deep, gas even deeper.

The squabble that broke out between the two Taliban factions days after they seized power continues to threaten the nation’s stability. Stakeholders like China and Russia, with interests in Afghanistan’s resources, including rare metals like lithium, aluminium, gold, silver, zinc, and oil galore, run deep in the country’s underground, are the most affected by a looming civil war which could avert their “peace-and-trade-making” efforts.

Speaking of resources yet to be exploited in Afghanistan, crude oil was estimated at roughly 1.6 billion barrels. At the same time, natural gas liquids allegedly account for 562 million barrels plus 15.7 trillion cubic feet of natural gas. Compared with neighbouring Iran’s 208.6 billion barrels notwithstanding US sanctions, these numbers seem petty. Yet still, not an amount one could just leave buried.

The Taliban rise into power surfaced a new pressing issue, the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline. On 18th August, Taliban spokesman Suhail Shaheen said that TAPI was a “long-term priority project” for the new government. In February, Taliban representatives visited Turkmenistan to offer assurance of their support for the project. 

Since the fall of the Soviet Union, energy companies have sought ways to transport natural gas from gas-rich Turkmenistan to energy-dry Pakistan and from there to India. For years, Turkmenistan’s Berdimuhamedov government and the Asian Development Bank (ADB) have made the pipeline a top priority. Unfortunately, it’s been on hold for lack of funds and huge deficits. However, the ascent of the Taliban changes the TAPI math. 

The main setback facing TAPI is financing. The ADB and local governments negotiated $10 billion for the full-scale pipeline project. However, Western industry insiders consider $14-16 billion to be a more realistic value. Even more so, as this valuation does not take into account upstream costs, which will be hefty if the TAPI is to supply anywhere close to the projected 33 BCMA capacity. These costs would allegedly rise to another $16 billion on top of the overall cost. What happens if costs turn out to be higher than expected? Taking into consideration any contingencies, it would be reasonable to assume that the full cost would be anywhere around $40 billion.

Being given a cold shoulder by the world’s leading banks, TAPI fell into oblivion (almost). Fearing the passage through war-shattered Afghanistan, international oil companies did not exactly rush to finance the project. So, who else is there? Turkmengaz, but Turkmengaz has no track record that could gain lenders’ trust. Suppose banks will eventually decide to finance the pipeline. How would they price the risks? Not to mention the questionable “liquidity” of the project, considering Pakistan’s deplorable reputation with energy payments.

What does all this mean for oil markets?

It’s a mixed bag of confusion. As fear continues to dominate the markets, oil prices have spiked. For the novice eye, the tussle in Afghanistan, which is neither a big oil-producing country nor a consumer, may have little to no impact on the oil markets. But think again. 

The uncertainty that this event could actually generate in the neighbouring countries, such as Iran, Saudi Arabia and the UAE, which have a say or two in OPEC+, exporting millions of barrels of crude oil per day.

According to a tweet by energy expert Narendra Taneja, “What happens in Afghanistan in near future will impact oil prices, especially if the Taliban go back to their old ways and allow sanctuaries to Islamic fundamentalists from hydrocarbon-rich Middle East, North Africa, and Central Asia”.

He also told the media that if the brawl is contained within Afghanistan’s boundaries, the impact on oil markets would be indeed limited; however, if it spills over across borders it could impact oil and energy prices.

Barrons, a Dow Jones & Company publication, also highlighted that the turmoil in the “Middle East [has] the potential to lift prices”. Moreover, the media notes that JP Morgan projects a jump in oil prices to $80 per barrel amid increasing demand and limited supply.

Since 9th August, WTI crude oil prices have shot up more than 11% as gas shortages threaten the world’s economies. 

Furthermore, the API (American Petroleum Institute) reported a whooping supply build-up of 4.127 million barrels  for the week ending 24th September. The output came in higher than analysts’ consensus (2.333 million barrels) for the week.

In comparison, for the week prior, the API reported an oil inventory draw of 6.108 million barrels, a greater loss than the 2.400 million barrel draw projected by analysts.

Between 27th and 28th September, WTI crude oil prices slipped 1.23%, partly owing to the data release. 

On 29th September, Wall Street saw WTI oil at $74.14, 1.53% lower amid US default fears. Will the US oil tank run dry? Stay tuned for more updates.

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