$70 more likely than $100: Bar­clays

Tehran Times - - ENERGY -

Oil in­dus­try ti­tans are still not in agree­ment over what to ex­pect from oil prices in the near fu­ture, with a wide ar­ray of guesses call­ing for both a spike in prices and a re­newed down­turn.

At the Oil & Money Con­fer­ence in Lon­don, this dis­agree­ment was on dis­play. Ian Tay­lor of Vi­tol, an en­ergy trader, said that he ex­pects oil prices to fall to $65 per bar­rel, while his coun­ter­part at Trafigura said that triple-digit oil prices were likely be­fore all was said and done.

A few weeks ago, $100 oil was all the rage, but the sud­den volatil­ity and tur­moil in global fi­nan­cial mar­kets has likely rocked some of that bullish­ness. Brent lost al­most $4 per bar­rel over two days.

There are plenty of rea­sons why oil could re­sume its up­ward climb, with the sup­ply losses in Iran and Venezuela at the top of the list. But a new re­port from Bar­clays ar­gues that even if oil prices spike, the spike would only be tem­po­rary. There are a few rea­sons why the bank believes that tripledigit prices are un­sus­tain­able.

First, while the out­look for the oil mar­ket looks tight, many of the vari­ables that an­a­lysts cite as rea­sons for higher prices are them­selves de­bat­able, Bar­clays ar­gues. Iran’s oil ex­ports have fallen sharply, per­haps by as much as 0.5 mil­lion bar­rels per day (mb/d) al­ready, or maybe more, but they won’t go to zero. The re­cent soften­ing po­si­tion from the U.S. govern­ment sug­gests that some sanc­tions waivers could be forth­com­ing. In­dia, Turkey and China are all likely to keep buy­ing at least some car­goes from Iran, Bar­clays ar­gues, which should put a floor beneath ex­ports. The dif­fer­ence be­tween Iran’s oil ex­ports plateau­ing at 0.5-1.0 mb/d as op­posed to zero is highly sig­nif­i­cant.

Sec­ond, low spare ca­pac­ity is an­other rea­son why many top oil ex­perts think prices might con­tinue to climb higher. But “OPEC has am­ple spare ca­pac­ity, in our view,” Bar­clays said. It’s dif­fi­cult to eval­u­ate this ar­gu­ment since Saudi Ara­bia has never proven its abil­ity to sus­tain­ably pro­duce at the lev­els they claim.

Third, the hes­i­ta­tion by OPEC+ to in­crease pro­duc­tion in the face of losses from Iran – a de­vel­op­ment that helped push up oil prices af­ter the Septem­ber OPEC+ meet­ing in Al­giers – is not a sign of a de­sire to push prices higher, Bar­clays ar­gues, but ac­tu­ally a recog­ni­tion that things could go south pretty quickly. “OPEC mem­bers are also ex­er­cis­ing cau­tion in how much down­ward pres­sure they ap­ply. They re­mem­ber adding out­put in 1997 in the run-up to a full-blown EM cri­sis,” Bar­clays said. If OPEC+ were to ramp up pro­duc­tion just ahead of a global eco­nomic slow­down, the group could end up crash­ing prices.

The re­cent melt­down in global eq­ui­ties is a vivid re­minder that the health of the global econ­omy is not as­sured. Ris­ing in­ter­est rates, trade head­winds, high oil prices, po­lit­i­cal tur­moil, a strong dol­lar and emerg­ing mar­ket weak­ness are all ob­sta­cles on their own. Com­bined, they could lead present a se­ri­ous threat to global growth. The “macroe­co­nomic back­drop has wors­ened since our last short-term out­look in July,” Bar­clays wrote.

Also, while most of the vari­ables men­tioned above are ex­oge­nous to the oil mar­ket, there are fac­tors unique to oil that could put an end to the rally.

A sea­sonal lull in de­mand in win­ter could take the heat off of the mar­ket. In ad­di­tion, the U.S. or Saudi Ara­bia would al­most surely meet an oil price spike with a sup­ply re­sponse. “We be­lieve ei­ther an SPR re­lease, a mas­sive uptick in Saudi ex­ports, or both, are high like­li­hood events in the fourth quar­ter,” Bar­clays said.

More­over, there is still a huge stock­pile of crude oil sit­ting in stor­age. “OECD and non-OECD strate­gic stock­piles could com­bine to pro­vide up to 5.4 mb/d of oil over 180 days to keep any se­ri­ous spikes in check,” Bar­clays wrote. Ul­ti­mately, the in­vest­ment bank ar­gues that the oil mar­ket will re­turn to a sup­ply sur­plus next year, mak­ing $70 per bar­rel more likely than $100.

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