Seven Reasons why oil super bulls could be wrong
Crude oil prices are expected to decline from their highest levels since November 2014, despite worries about US sanctions on Iran and a potential conflict with Israel.
They are only likely to surge to extreme heights if there’s a full-scale Middle East war involving Saudi Arabia
There are several reasons why oil prices are likely to peak
First, the US Treasury has stated that sanctions on oil and other products from Iran will take place in 90 to 180 days. This means that Iran, which produced 3.8 million barrels of oil a day in March, according to the International Energy Agency (IEA), will continue to supply buyers until at least August. Some contracts will last until November, according to analysts.
Second, hedge funds and other speculators have built up large bull positions in oil, partly because they expected US President Donald Trump’s sanctions announcement. Net fund and smaller speculator bull positions in the West Texas futures and options contracts amounted to the equivalent of 736 million barrels on May 1. The US Commodity Futures Trading Commission statistic excludes internationally traded Brent derivatives contracts. So speculation is likely to be much broader. Brent prices reached $77.89 a barrel on Thursday, a wide premium over the WTI price of $71.60. In February this year, Brent was $61.40 a barrel, a premium of only $3 over WTI. Several fund managers have been forecasting even higher prices, but if their expectations are thwarted, traders expect them to take profits.
Third, Saudi Arabia – which supports Mr Trump on the sanctions decision – could raise production to counter any anticipated loss of Iranian exports after November this year.
Fourth, the IEA stated in its April report that demand from China and India was already falling. World trade and economies have been slowing, so higher oil prices could dampen global demand and encourage greater use of alternative energy.
Fifth, higher oil prices are encouraging US fracking producers to raise output and the IEA estimates that production will rise from 14.16 million barrels a day in the first quarter to 15.28 million barrels in the fourth quarter of this year. The surge in production, which places the US almost level pegging with Russia and former USSR states, has caused the WTI discount to Brent prices. Moreover, the surge in fracking has also boosted natural gas supplies, an increasingly popular energy source.
Sixth, the Iranian regime will have to sell as much oil as possible to boost the sinking economy and currency. The struggling Iranian people are struggling and there are protests all over the country.
Finally, the IEA estimates that the Organisation for Economic Cooperation and Development (OECD) oil industry stocks were 2.84 billion barrels in February. This is equivalent to 60 days demand for OECD nations. Government strategic stocks of oil, which can be sold in an emergency, amounted to 1.57 billion.
Finely Balanced
Despite the above reasons, the oil market remains finely balanced. If the missile sorties between Israel and Iran become a full-scale conflict or Iran once again renews its nuclear warhead ambitions, oil prices could surge. Such a rise, however, would be brief, unless the Saudis entered the war. That has been the pattern historically.
Prices began to rise in recent months and are well above the lows of US$30 a barrel in January 2016, mainly because the Organization of Petroleum Exporting Countries (Opec) has cut output. The IEA’s report shows that Opec’s crude oil production declined by around one million barrels a day since 2016 to 31.83 million barrels a day. This reduction plus worries about Venezuelan output (down 750,000 barrels in 2016 to 1.49 million a day), helped lift oil prices. In the first quarter of this year, global demand thus exceeded supplies of 97.1 million barrels a day by 200,000 barrels a day.
Soaring prices in the chart above, however, illustrates that the deficit could well be discounted.
The other view
Goldman Sachs, Merrill Lynch and some other investment banks remain bullish. They contend that renewed sanctions, Middle Eastern conflicts and risks to Venezuela supplies could boost oil prices well above current levels.
© copyright Neil Behrmann.
Neil Behrmann is London correspondent of The Business Times Singapore. Jack of Diamonds his thriller on global diamond mining and smuggling, has just been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner