Forecasters: Get ready for costly oil
Major oil trading houses are predicting the return of US$100-abarrel crude for the first time since 2014 as Opec and its allies struggle to compensate for US sanctions on Iran’s exports.
Brent crude has already jumped to an almost four-year high at the start of this week — exactly the kind of price surge President Donald Trump has been seeking to prevent by pressuring the Organisation of Petroleum Exporting Countries to raise production. Yet the cartel and its allies gave mixed signals at a meeting in Algiers last weekend, showing little sign they would heed US demands to rapidly push down crude prices.
“The market does not have the supply response for a potential disappearance of 2 million barrels a day in the fourth quarter,” Mercuria Energy Group cofounder Daniel Jaeggi said in a speech at the S&P Global Platts Asia Pacific Petroleum Conference. “In my view, that makes it conceivable to see a price spike north of US$100 a barrel.”
In May, when Trump announced plans to reimpose sanctions on Iran’s oil exports, the market estimated a cut of about 300,000 to 700,000 barrels a day, said Trafigura Group co-head of oil trading Ben Luckock. However, the consensus has now moved to as much as 1.5 million barrels daily.
Iran’s production “is going to be significantly less than it was, and probably lower than most people expected when the sanctions were announced,” Luckock said at the conference. He sees US$90 oil by Christmas and US$100 early next year.
Opec isn’t just grappling with US sanctions cutting Iranian supply. Output in Venezuela is also slumping due to an economic crisis. The biggest source of new global supply, US shale, is also experiencing growing pains as pipeline bottlenecks and workforce issues hamper growth.
For all these urgent supply pressures, the world’s largest oil producers adopted a sit-back-and-wait approach at their meeting in the Algerian capital on Sunday. Saudi Arabia, Russia and the United Arab Emirates insisted they had the spare capacity to satisfy the market’s needs, but wouldn’t tap it pre-emptively.
“Our plan is to meet demand”, said Saudi Energy Minister Khalid AlFalih.
The bullish sentiment also infected Wall Street bankers and hedge funds, with some caveats.
Francisco Blanch, head of commodities research at Bank of America, said in a note to clients that signals from Opec mean “the likelihood of an oil spike and crash scenario akin to the one observed in 2008 has increased”. A decade ago, Brent crude surged to nearly US$150 a barrel, only to crash just months later.
The likelihood of an oil spike and crash scenario . . . has increased.
Francisco Blanch, Bank of America Corp