Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

The bullish and bearish case for oil

By Nicholas Cunningham - posted Friday, 20 April 2018


Oil prices could rise due to the “perfect storm of stagnant supply, geopolitical risk, and a harsh winter,” according to an April 12 note from Barclays.

Geopolitical events specifically could help keep Brent above $70 through April and May, which comes on the back of a substantial decline in oil inventories.

The investment bank significantly tightened its forecast for Venezuelan production, lowering it to 1.1-1.2 million barrels per day (mb/d), down sharply from its previous forecast of 1.4 mb/d. That helped guide the bank’s upward revision for its price forecast for both WTI and Brent in 2018 and 2019, a boost of $3 per barrel.

Advertisement

The flip side is that the explosive growth of US shale keeps the market well supplied, and ultimately forces a downward price correction in the second half of the year, Barclays says. In fact, the investment bank said there are several factors that could conspire to kill off the recent rally. One of the looming supply risks is the potential confrontation between the US and Iran. The re-implementation of sanctions threatens to cut off some 400,000 to 500,000 bpd of Iranian supply.

But Barclays says these concerns are “misguided,” with the risk overblown. “Yes, it should kill the prospects for medium-term oil investment, and yes it could destabilize the region further, but we struggle to accept a narrative that the market had been expecting big gains in Iranian output over the next several years anyway.” Moreover, the ongoing losses from Venezuela are also broadly accepted by most analysts. “Therefore, it is worth suggesting that in both of these countries, a dire scenario may already be priced in,” Barclays wrote.

Ultimately, the current price levels could be “as good as it gets,” Barclays argues. The bank forecasts Brent will average $63 per barrel this year and only $60 per barrel in 2019.

However, Goldman Sachs is way more bullish, noting that the sudden spike in geopolitical tension only “reinforces” its prediction of a 10 percent increase in commodity prices over the next 12 months. With the potential for inflation, the backwardation in the oil futures curve, and supply risks from geopolitical instability, “the strategic case for owning commodities has rarely been stronger,” Goldman analysts wrote last week.

Goldman also cited the recent attacks on Saudi oil facilities, a development that would normally frighten oil traders but these days arguably doesn’t even rank in the top 5 in terms of supply risks. Iran-backed Houthi rebels in Yemen have targeted Aramco facilities and an oil tanker, although none have succeeded in disrupting supply.

Ultimately, Goldman believes there won’t be a major loss of supply to the market unless a broader Saudi-Iran conflict erupts. “Nonetheless, as we have argued in the past, with low and declining inventories the market remains vulnerable to even small disruptions,” the bank wrote.

Advertisement

While Barclays believes the risk of a disruption of Iranian supply is overblown, Goldman Sachs has a more nuanced take. US sanctions could force European refiners to reduce their purchases of Iranian oil, but the real question is if Iranian oil is simply rerouted to Asia or if Iran is forced to incur cutbacks. The effectiveness of US sanctions on shipping insurance might be the key to answering this question. In any event, Goldman says that a hypothetical 500,000-bpd loss of Iranian supply could result in a price increase of $7 per barrel. From there, the question is whether or not Saudi Arabia steps up production to compensate, which would blunt the price impact.

Of course, for oil prices, much comes down to what OPEC ultimately decides to do at its June meeting. All recent signs point to an extension of the supply curbs through the end of this year, perhaps into a good portion of 2019. OPEC countries appear more determined than ever to erase the supply surplus, something that the IEA said last week had likely been accomplished.

The cartel seems to want to take no chances, and has discussed keeping the cuts in place through the first half of 2019.

Much of the motivation comes from Saudi Arabia, OPEC’s most influential member, who reportedly wants $80 per barrel to bolster the valuation of Saudi Aramco.

The risk to the oil market is that OPEC allows the supply balances to tighten too much, draining inventories far below what it had anticipated. “If OPEC does not begin to compensate for the non-fundamental drivers of the oil price by using its own relief valve of higher output, it may find the market shifts structurally before it has time to react,” Barclays wrote in a note.

  1. Pages:
  2. Page 1
  3. All

This article was first published on OilPrice.com.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

1 post so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Nicholas writes for OilPrice.com.

Other articles by this Author

All articles by Nicholas Cunningham

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 1 comment
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy