The Bullish And Bearish Case For Oil

Authored by Nick Cunningham via OilPrice.com,

Oil prices could rise due to the “perfect storm of stagnant supply, geopolitical risk, and a harsh winter,” according to an April 12 note from Barclays.

Geopolitical events specifically could help keep Brent above $70 through April and May, which comes on the back of a substantial decline in oil inventories.

The investment bank significantly tightened its forecast for Venezuelan production, lowering it to 1.1-1.2 million barrels per day (mb/d), down sharply from its previous forecast of 1.4 mb/d. That helped guide the bank’s upward revision for its price forecast for both WTI and Brent in 2018 and 2019, a boost of $3 per barrel.

The flip side is that the explosive growth of U.S. shale keeps the market well supplied, and ultimately forces a downward price correction in the second half of the year, Barclays says. In fact, the investment bank said there are several factors that could conspire to kill off the recent rally. One of the looming supply risks is the potential confrontation between the U.S. and Iran. The re-implementation of sanctions threatens to cut off some 400,000 to 500,000 bpd of Iranian supply.

But Barclays says these concerns are “misguided,” with the risk overblown. “Yes, it should kill the prospects for medium-term oil investment, and yes it could destabilize the region further, but we struggle to accept a narrative that the market had been expecting big gains in Iranian output over the next several years anyway.” Moreover, the ongoing losses from Venezuela are also broadly accepted by most analysts. “Therefore, it is worth suggesting that in both of these countries, a dire scenario may already be priced in,” Barclays wrote.

Ultimately, the current price levels could be “as good as it gets,” Barclays argues. The bank forecasts Brent will average $63 per barrel this year and only $60 per barrel in 2019.

However, Goldman Sachs is way more bullish, noting that the sudden spike in geopolitical tension only “reinforces” its prediction of a 10 percent increase in commodity prices over the next 12 months. With the potential for inflation, the backwardation in the oil futures curve, and supply risks from geopolitical instability, “the strategic case for owning commodities has rarely been stronger,” Goldman analysts wrote last week.

Goldman also cited the recent attacks on Saudi oil facilities, a development that would normally frighten oil traders but these days arguably doesn’t even rank in the top 5 in terms of supply risks. Iran-backed Houthi rebels in Yemen have targeted Aramco facilities and an oil tanker, although none have succeeded in disrupting supply.

Ultimately, Goldman believes there won’t be a major loss of supply to the market unless a broader Saudi-Iran conflict erupts. “Nonetheless, as we have argued in the past, with low and declining inventories the market remains vulnerable to even small disruptions,” the bank wrote.

While Barclays believes the risk of a disruption of Iranian supply is overblown, Goldman Sachs has a more nuanced take. U.S. sanctions could force European refiners to reduce their purchases of Iranian oil, but the real question is if Iranian oil is simply rerouted to Asia or if Iran is forced to incur cutbacks. The effectiveness of U.S. sanctions on shipping insurance might be the key to answering this question. In any event, Goldman says that a hypothetical 500,000-bpd loss of Iranian supply could result in a price increase of $7 per barrel. From there, the question is whether or not Saudi Arabia steps up production to compensate, which would blunt the price impact.

Of course, for oil prices, much comes down to what OPEC ultimately decides to do at its June meeting. All recent signs point to an extension of the supply curbs through the end of this year, perhaps into a good portion of 2019. OPEC countries appear more determined than ever to erase the supply surplus, something that the IEA said last week had likely been accomplished.

The cartel seems to want to take no chances, and has discussed keeping the cuts in place through the first half of 2019. Much of the motivation comes from Saudi Arabia, OPEC’s most influential member, who reportedly wants $80 per barrel to bolster the valuation of Saudi Aramco.

The risk to the oil market is that OPEC allows the supply balances to tighten too much, draining inventories far below what it had anticipated. “If OPEC does not begin to compensate for the non-fundamental drivers of the oil price by using its own relief valve of higher output, it may find the market shifts structurally before it has time to react,” Barclays wrote in a note.

Comments

boattrash Tue, 04/17/2018 - 08:10 Permalink

" Ultimately, the current price levels could be “as good as it gets...” "

Bullshit! In time, as the $$ becomes moar worthless, we could see $100...$150...$500...just pick a fucking number.

Edit; I'm not ancient, but I do remember buying a cold Coke and full-size Snickers bar for $0.25 as a kid, and $0.50 would fill my gas jug to earn more $$ mowing lawns.

shortonoil Tue, 04/17/2018 - 08:15 Permalink

This guy still doesn't know that shale is a diluent and petro chemical feed stock. It is not a replacement for higher quality crude that can be processed into fuels. It has an entirely different molecular structure. He probably also thinks that magnesium is a good replacement for copper. As far as crude that can make fuels is concerned, the world is finding 1 new barrel for every 9 it burns. http://www.thehillsgroup.org/

Last of the Mi… Tue, 04/17/2018 - 08:18 Permalink

OPEC's ability to control oil price through production output, especially in the case of reduction, is a very long term proposition involving years due to the baked in debt levels these countries no have. Going up, everything's rosy, coming down all the debt shows and a massive scouring of the earth takes place for an alternative that produces the same ROI. In short, there is none. Pumping oil out of the ground and charging $105/bbl was a really really nice deal while it worked. The problem is that the market dynamics and economics have changed massively.

The US is till teetering on recession although employment is looking a little better. Disposable income is still non existent and will remain so as long as Obamacare is in effect which has a drastic effect on demand. Taxes levied on gasoline when the price was down suddenly have a massive effect as the price goes back up towards $3 per gallon and politicians are clueless to the cause and effect.

Not to mention the US produces more for it's own consumption and no longer has to depend on the "camel cabal" for oil and that is just not likely to change in the near future thus denying OPEC a major input into the dynamics of the US economy. What they have left is nothing more than to propagandize about it and the effect is seen in the attempted ARAMCO deal. Why would you ever sell 5% of a highly profitable endeavor if the road ahead was so damn rosy.

Back to the desert with your camels and your inbred centuries old wars for the sake of violence. Good riddance.

Smerf Tue, 04/17/2018 - 08:32 Permalink

If only global demand and supply of oil could be boiled down to the price of a barrel of crude equivalent and all participants had access to these pricing windows.  Rather, it is a fragmented picture, a mosaic of consumers, producers, refiners, distributors, government, full of corruption, crime and violence.  Chaos. 

The good stuff - oil that comes out of the ground on it's own, close to a port and refiner; the light sweet crude that jets like - that stuff belongs to the Cabal within the UK/USA, wherever that oil finds itself in the world.  These deposits are National Security Interests.

Any nation or people in opposition to this are enemies and deserve all manner of violence applied to them.  

Ink Pusher Tue, 04/17/2018 - 10:36 Permalink

None of the sources contained within this article are reliable or trustworthy.

Neither is the plethora of speculative bullshit they have collectively published.

*Bahrain just found another 80 Billion Barrels and has 14 Trillion Cubic Feet of Gas Reserves. 

Interesting that the above doesn't even get a mention considering the news is only a week old eh??

 

Sapere aude Tue, 04/17/2018 - 15:43 Permalink

Except Bahrain didn't find another 80 billion barrels. It didn't find 1million barrels, it is a PROSPECTIVE resource, so it could contain nowt!

These silly stories that are designed to create the impression of an oil glut are so ridiculous.

Look, for a start U.S. shale is a giant Ponzi scheme, where not one of them made profits at $80 let alone $50!

The Bahrain prospect is even worse. Not only is it shale, but its offshore shale!!!