The perfect storm that could drive oil even higher
After rallying more than 30 percent year to date, oil prices could be set for a further upside in coming weeks as a combination of near-term bullish supply-side factors could push prices higher than current levels.
Over the next few weeks, several critical geopolitical events could set the trend for even higher oil prices in coming months. These events, combined with a tightening global oil market, could leave prices vulnerable to any sudden supply outage on top of the production cuts by OPEC and its Russia-led non-OPEC allies.
Experts who have recently spoken to CNBC recognize the fact that the oil market may be set for a major disruption on the supply side, although they diverge on who the single biggest disruptor may be.
The three top candidates are Iran, Venezuela, and Libya. All three OPEC producers were exempted from the cartel’s production cuts that began in January and are expected to last at least until June. And all three have shown so far this year that there was good reason to be exempted—their respective production has been either falling or volatile, and set for further disruptions in coming weeks and months.
According to Stephen Brennock, an oil analyst with PVM Oil Associates, it’s Libya that will pose the biggest geopolitical risk to oil markets.
Eastern strongman General Khalifa Haftar ordered earlier this month his Libyan National Army (LNA) to march on the capital Tripoli. The self-styled army has been clashing with troops of the UN-backed government in a renewed confrontation that could escalate and threaten to disrupt, once again, Libya’s oil production and exports.
“Oil production in the country has yet to be disrupted however I suspect it is a matter of when not if. General Haftar and his eastern Libyan forces are determined to seize Tripoli and with it comes the inevitable risk of supply outages,” Brennock told CNBC in an email.
Cailin Birch, global economist at The Economist Intelligence Unit (EIU), believes that it’s Iran and the US sanctions on its oil industry that is the most important supply-side issue. The unpredictability of the US Administration’s policy could result in the U.S. cutting off waivers for Iranian oil customers due to expire in early May, Birch told CNBC.
Many other analysts, however, believe that the US—despite its continued talk of “maximum pressure” on Tehran and “zero exports” from Iran—will be more lenient, again, toward the key Iranian oil buyers. The reason—fear of driving oil (and gasoline) prices too high.
Some analysts say that with the focus on tightening the sanctions on Venezuela and Nicolas Maduro’s regime, the US could go softer again on Iranian customers, because those two supply disruptions combined, plus a possible outage in Libya, could tighten the market too much and result in oil prices overshooting.
“This may turn out to be a black swan event as it would force the OPEC+ alliance to reopen the oil spigots,” Brennock tells CNBC.
Speaking of a black swan event, Goldman Sachs’ head of commodities research Jeff Currie told CNBC earlier this month that such an even would more likely be economic and monetary policy changes in a major economy, such as China or the United States.
Goldman Sachs is one of the investment banks that don’t see oil prices reaching $80 a barrel as they did in Q3 last year because there’s only modest upside to price gains.
Citigroup, however, sees more upside than downside in oil prices.
Bank of America Merrill Lynch says “the risk of a Brent crude oil price spike is significantly higher than options markets suggest,” as the new regulations by the International Maritime Organization (IMO) to cap the sulfur content in ship fuel are bound to further disrupt the oil and refining markets by the end of this year.
“Crude oil’s near 40-percent rally from the December low has resulted in both WTI and Brent clawing back half the losses seen between October and December. With global demand growth holding up despite the prospect for lower global growth, the market has instead been left to focus on a near-perfect storm of price-supportive supply news,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in the bank’s Q2 2019 Quarterly Outlook.
“With Opec+ continuing to cut production and the US forcing down exports from Iran and Venezuela, only a major change in the outlook for demand will alter the current positive sentiment,” Saxo Bank’s expert noted in early April.
Saudi Arabia and several other OPEC producers need oil prices above $80 for budget purposes and are unlikely to be happy with only $70 a barrel Brent, Hansen said, adding:
“On that basis, we expect supply to be kept tight over the coming months, thereby supporting a potential extension towards $75 per barrel before it eventually runs out of steam amid renewed concerns about the negative impact to global growth.”