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The Major Wildcard That Could Send Oil To $120

Oil

The latest rally in oil prices ran up against a wall yet again, and the same fears about oversupply have not receded in the slightest. The expectation from most oil analysts is that there is very little room on the upside for oil prices and that we will have to wait until 2018 at the earliest before the market gets closer to “balance.”

But the one major wildcard for oil prices is geopolitics, which, however unlikely given the degree of supply overhang that still exists, could send prices up. But how high? The latest blockade of Qatar, which has mushroomed into a regional political crisis in the Middle East, would have caused a severe spike in oil prices in the past, even though Qatar is a relatively minor producer. However, the simmering standoff not only failed to register, but occurred at a time of falling oil prices.

If a crisis involving heavyweight oil producers was shrugged off by the market, it is hard to imagine some other event causing a sharp price spike, even if more barrels were on the line.

But that is exactly what some analysts are afraid of, warning that the markets are overlooking some potentially massive geopolitical problems looming just over the horizon.

"Venezuela's 2 million barrels of oil a day could literally go any day. Mexico looks poor. Azerbaijan's in trouble. China's own production is collapsing rapidly," Neil Dwane, the chief investment officer of European equity at Allianz Global Investors, told CNBC last week.

"One only has to have one mistake and the only thing you'll be talking about all morning is oil at $120."

Herman Wang of S&P Global Platts agreed with that sentiment, although he expects the price spike to be less severe. "There are plausible scenarios where you could see, perhaps not $120 a barrel, but an elevated oil price, say $70 to $80 on some of these geopolitical and some of the supply concerns. Venezuela certainly is a mess right now," Wang told CNBC's Squawk Box last week.

But there are a few reasons why some analysts would roll their eyes at the prospect of triple-digit oil prices in the near future. After all, oil inventories are still sky-high even if they are starting to come down; U.S. shale production has roared back, adding roughly 0.5 mb/d since late last year; and Libya and Nigeria have restored around 400,000 barrels per day of disrupted production. Not only that, but sharper gains are expected to be forthcoming from the U.S., Nigeria and Libya, while other long-term projects in Canada and Brazil are set to add production this year. Related: $30 Oil Could Spark Contagion In Energy Markets

However, not all of that is guaranteed. The U.S. shale rally recently hit some bumps in the road. More importantly, the geopolitical uncertainty in unstable countries such as Libya and Nigeria could quickly knock production offline once again. For example, Reuters reported that heavy clashes took place in Libya on July 9, underscoring the fact that the country’s recent calm is highly fragile.

Also, the peace in the Niger Delta is also starting to look rocky. Former militants, according to Reuters, are unhappy with government promises, and have threatened a return to violence. "This peace is a graveyard peace," a local chief in the Niger Delta told Reuters. "Nobody can assure anybody that nothing will happen in the Delta." Nigeria is aiming for 2 mb/d of production in August, which would be the highest total in a year and a half, and almost double the low point from last year.

There is also the vaguer and more uncertain variable of the recent ascendance of Saudi Crown Prince Mohammed bin Salman, who has brought a more hawkish approach to Saudi foreign policy. The escalation of confrontation against Qatar is one clear consequence of that. So is the war in Yemen. More conflicts could arise from a more belligerent Saudi government. “We contend that the region could be subject to more volatility and heightened risk,” as a result of Mohammed bin Salman taking over as crown prince, RBC wrote in a note last month.

But it is Venezuela that could be the mother of all black swan events. As Neil Dwane of Allianz Global Investors mentions, Venezuela has already seen the near total breakdown of society, and its oil production of 2 million barrels per day (mb/d) could unravel. It still seems unthinkable at this point, but becoming more likely by the day. Already, Venezuela’s oil production has eroded sharply, falling to 1.96 mb/d as of May 2017, down from 2.375 mb/d in 2015. Meanwhile, Venezuela’s refining industry is in shambles, forcing the country to increasingly import gasoline to avoid fuel shortages.

The street protests in the South American country just marked their 100th day, and show no sign of slowing down.

The oil market is rather depressed and subdued at the moment, but could awaken at moment’s notice if large volumes of oil production are disrupted from some unforeseen event.

By Nick Cunningham of Oilprice.com

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  • Henry on July 10 2017 said:
    Just pure clickbait bordering on irresponsible. We are awash in oil. The SPR still needs to bleed out 300 million barrels of oil. Oil price back to $120 my goodness I just saw Elvis
  • Phil Nickerson on July 10 2017 said:
    That price might sound good for the greedy but it is a price that would crash the economy!!! It's not sensible based on what we're presently paying at the pumps!!!
  • Just for laugs on July 11 2017 said:
    "Oil prices will surely rise" says increasingly nervous man for the 17'th time
  • spin on July 11 2017 said:
    I hope this happens in not now but in around 6-12 months when the Telsa Model 3 production is fully up to speed and along with other interesting alternative fuel trucks coming out I think this could really speed up the demise of the ICE age.
  • snoopyloopy on July 12 2017 said:
    If oil goes to $120, demand will plummet not just from the recession that it triggers, but from all the companies and people who will go hunting for an electric vehicle. Tesla will be sold out for years.
  • N8 Dawg on July 12 2017 said:
    Yes $120 was indeed click bait and if you took the bait and read the article then you read that it was not plausible we'd see $120 oil but likely $70-$80 in the event of some of the aforementioned geopolitical unravellings. Does anyone read more than just headlines these days? Not only are those types of numbers more realistic but also represent a range that many of us working in the industry are hoping to see. It would get us all back to work, provide much needed tax revenues in oil towns like my hometown of Bakersfield, CA, and not break the bank economically for everyone else. The last thing I want is for any country's misfortune to be to my benefit or the benefit of my industry, but if it happens then that's just the reality of the situation. In addition to the potential geopolitical events stated in the article, I haven't heard much lately in regards to the possibility of sanctions on Iran since the Iranian presidential election and even less since we turned out focus on Qatar and the Arab countries cutting ties with them. EV's are coming as fast as they can, even at current low fuel prices. The thing that is limiting the pace at which they are produced is the availability of "conflict minerals" like cobalt and lithium.
  • zorro6204 on July 12 2017 said:
    The problem with Venezuela production is that dropping to zero would clear the way for it to soar reasonably soon after the lunatics running the government get thrown out and possibly hung from the nearest lamp post. With a moderate, pro-business government in place, US and European majors would be knocking at the door, ready to take advantage. Any kind of normalcy returning to that country could kick production to the skies eventually. There's a ton of unused capacity.
  • John Brown on July 13 2017 said:
    Funny how every time the huge glut, of oil and even great glut of oil producing capacity begins to drop the price of oil, which has no reason today to be above $30 a barrel, we get all these articles about potential crisis, and suddenly oil stocks in the USA mysteriously drop despite the fact that oil is dropping. All those things tend to do what the corrupt oil markets want. Prop up the price of oil despite the huge glut.
    Venezuela is a great example. If the incompetent, corrupt, Marxist Maduro Dictatorship fell tomorrow and all production stopped it would spike oil prices, but other than that why would anybody notice. There is plenty of surplus oil in stock and floating around to cover that shortage for months. There is also far more than 2 million barrels of oil producing capacity sitting idle with OPEC, Russia, and other producing companies that would jump at the chance to sell more oil, especially if prices spiked, and of course move oil up to $75 a barrel or higher and the fracking industry in the USA, with greatly lowered cost, goes into hyper overdrive, and it doesn't take 2 years to bring on more production these days, you'd start seeing it in 3 to 6 months.
    Meanwhile Venezuela can't feed itself after so many year of the Chavez/Maduro Marxist Dictatorship, so whatever happens there will be a race to bring that production back on line ASAP if only to keep people from starving, and you can bet U.S. and other oil companies will be jumping in to help restore production, and then bring even more online ASAP. The oil industry is lucky they've had the incompetent Marxist Chavez/Maduro dictatorship to deal with or Venezuela would be producing 3 or 4 million barrels a day not 2, and oil would be at $20 a barrel.
    And while we sit here and speculate renewable energy sources like wind and solar continue to inch up in market share even if hugely subsidized by Governments.
    So unlike ever before its hard to see how a crisis in one or even two major oil producers should cause anything but a mild spike in oil prices, and if that's spike is to $120 than in short order huge additional capacity will come online, and you'll really see prices drop in short order.
  • William Livingston on July 14 2017 said:
    Volvo with less than 1% of the global auto market remains a tiny niche player no matter what does

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