Oil price rise on regional tensions won’t last, say analysts,

Brent oil’s price rise to a threeyear high of US$72.5 (Dh266) a barrel last week, caused by rising tension in the Middle East, is unsustainable in the medium term, analysts say.

Brent “will sustain just over $70 per barrel pretty much through to the end of [September], over the summer months when we’ve got typically very high refining runs in the Atlantic Basin because of summer driving season”, Alan Gelder of energy consultancy Wood Mackenzie told The National.

Brent, the international benchmark for sweet light crude, reached a three-year high on Friday as the US, UK and France prepared to launch missile attacks against Syria.

The three countries began striking Syrian targets in the early hours of yesterday in retaliation for the regime’s use of chemical weapons in a rebel-held province, which killed more than 70 people and injured hundreds.

Oil prices began to rally above $70 last week as the White House convened to decide on the Syria offensive.

The price of Brent, which fell to half of its $100 levels in 2014, has had a slow rise since last year after Opec and other producers, led by Russia, put limits on output.

Analysts remain convinced that Brent’s rise is short-lived.

“While fundamentals are looking OK, we are not convinced they currently support a $70-plus price and see room for unwinding of long positions in Brent,” said Christopher Haines, the head of oil and gas at BMI Research.

Much of the recent price appreciation was due to geopolitical risk, related to missile attacks against Saudi Arabia, the world’s biggest oil exporter, and the military threats against Syria, which has prompted speculative oil buying that is “now heavily over extended”, Mr Haines said.

The military action against Syria is unlikely to disrupt supply because the country is a minor producer but oil markets must brace for disruptions from two Opec members.

Venezuela is in the middle of a political upheaval that has limited its production, while the US has threatened to scrap a nuclear deal with Iran that could affect its oil output.

Disruptions from Opec suppliers will also be offset to an extent by a surge in production of US shale crude.

“Oil prices will taper in the latter half of this year and into 2019 because we expect strong supply growth from the US, very strong growth from the Permian [Basin in Texas and New Mexico],” Mr Gelder said.

“We can expect to see a significant drop in supply in Venezuela. You also have some uncertainty around the geopolitics in the Middle East, particularly around the potential return of sanctions from the US to Iran relating to their nuclear programme.”

Opec and its allies decided to pull 1.8 million barrels a day of crude out of the market over the past year and reduce high inventories to support prices. That decision is up for review mid-year. Any supply collapse in Venezuela and Iran could force an early exit.

“If you look at Opec’s recent pronouncements, they’re seeing stronger supply growth out of non-Opec countries so our view is that they need to maintain the current cut,” Mr Gelder said.

Oil prices will taper in the latter half of this year and into 2019 because we expect strong supply growth from the US

ALAN GELDER

Wood Mackenzie