Brent on course for $80 levels, analysts say

Brent’s steepest decline in two years in terms of one-day percentages is out of sync with market fundamentals, said analysts who expect the benchmark to climb to $80 levels for the rest of the year.

“The current reduction from $78 to $75 per barrel is really just part of the ‘normal’ oil market swings,” said Spencer Welch, oil markets and downstream director at IHS Markit in London.

“Through [the third quarter] we don’t expect the crude price to fall much more, it is more likely to go back up and might even get to $80 per barrel again. The market is tight, spare production capacity is limited and therefore the oil market is exposed to the risk of any unexpected supply disruption,” he added.

On Wednesday, Brent, the benchmark for light, sweet crude declined by 6.9 per cent to end at $73.40 per barrel, the biggest decline in two years, after trending largely upward for much of the first half of the year. US crude meanwhile also fell 5 per cent to reach $70.38 per barrel – its worst one-day decline in a year.

Rising tension between the US and China as well as the lifting of force majeure by Libya’s National Oil Company is likely to allow recovery of crude production by 500,000 barrels per day over the coming weeks, UBS said in a research note.

The Swiss investment bank maintains a bullish outlook for Brent, expecting it to climb to $85 per barrel over the next three and 12-month periods.

“We think the price drop is out of whack with the fundamental reality of low spare capacity globally and Iranian output set to decline considerably, which should keep the oil market vulnerable to additional supply disruptions in the months ahead,” the bank said on Thursday.

UBS, based in Zurich, noted, however, that contrary to market expectations of the US mellowing its approach on sanctions over Iran, it observed no shift in policy towards the Islamic Republic.

“In our view, the administration still wants to see a sharp decline in Iranian oil exports by the end of the year,” the bank said.

Worsening of the ongoing trade war between the US and China could weigh on oil demand, it added, saying the market remained “very sensitive” to supply news with disruptions likely to impact low spare capacity further.

Brent’s recent fall was largely owing to Libyan supplies hitting the market, said Mr Welch. Libyan production being offline had earlier been one of the causes for rallies in the oil market.

“At the end of June Opec [and allies] announced an extra 1 million bpd of crude on to the market from July,” said Mr Welch.

“What happened to price? It went up, why because of US sanctions on Iran and supply disruptions taking 800,000 bpd of Libyan exports off the market.

“The recent fall is because Libyan crude loadings are increasing again.”

Rising tension between the US and China is likely to allow recovery of crude production by 500,000 barrels per day