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Can OPEC Control The Oil Bulls?

Other Oil Guy

The recent spike in oil prices has given way to all sorts of questions: Is $80 oil possible? Is this the end for low oil prices? Can OPEC control the oil bulls? 

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Brent flirted with $60 per barrel this week, but it might have to wait a little longer. After hitting the highest price in two years mid-week, Brent declined on Thursday after looking a bit overstretched. The price gains have been a little too much in such a short period of time, raising the risk of a downslide. "We've made a really impressive run here and I do think we're due for a pullback," Robert Yawger, director of energy futures at Mizuho in New York, told Reuters on Thursday.

Is $80 oil possible? There is quite a bit of disagreement about what happens next with oil prices. One notable call comes from Jodie Gunzberg, head of commodity and real asset indices at S&P Dow Jones Indices, who told CNBC that $80 is possible. She argued that Hurricane Harvey ignited a bit of bullishness from the outages, which could propel oil prices up in the coming months. "When we look at the index data, we can see the price could move even as high as $80 to $85 (a barrel). Not immediately, but with their structural backwardation and shortages in the market, you just can't replenish it overnight,” she said. "It is now in a bull market, Brent is up about 30 percent since June and we also had WTI up 23 percent."

End of low oil prices? A top official from oil trading house Trafigura told an industry conference in Singapore this week that the “lower for longer” era was coming to an end. He argued that the oil market could see a supply deficit on the order of 2 to 4 million barrels per day (mb/d) by the end of 2019. While those were probably the most bullish comments at the event, other energy leaders at the event also struck an optimistic tone.

Related: Oil Prices At A Ceiling, Or Just Getting Started?

OPEC not as confident. Although the oil market has experienced a bullish streak as of late, OPEC is not quite as confident that the price gains will continue. According to Reuters, OPEC officials are worried that demand will taper off and supply excesses will push down prices in the first quarter of 2018. Some top OPEC officials don’t see Brent holding near the $60-per-barrel level. “I don’t think it’s sustainable,” an official from a Gulf oil producer told Reuters. Another said that the current rally “might be short-lived.” He went on to add, “I think a range of $50-$55 a barrel is good, you don’t want to see prices rising to $60 or higher because then it will bring in more shale.”

ExxonMobil makes big bet on Brazil. ExxonMobil (NYSE: XOM) won eight offshore blocks off the coast of Brazil in a recent auction, highlighting the sudden interest in Brazil after the Brazilian government loosened its laws and allowed international investment. Brazil took in more than $1.1 billion in the auction. Still, Exxon is late to the game – Royal Dutch Shell (NYSE: RDS.A) already has a large presence in Brazil. Brazil’s energy liberalization has come after years of disappointing results and surging debt from state-owned Petrobras.

U.S. Gulf Coast shakes off Harvey effects. Refined product exports are rebounding strongly as the region’s refineries come back online. That has eased the pressure on gasoline and diesel markets, pushing down margins that had spiked a few weeks ago.

Oil majors step up Permian investments. Earlier this week Chevron (NYSE: CVX) said that it would spend $4 billion on the Permian basin next year. On Thursday, ExxonMobil (NYSE: XOM) revealed that it has acquired another 22,000 acres in the Permian, bringing its total to about 400,000 acres. The oil majors, particularly this year, have shifted away from some riskier projects around the world and stepped up their investments in the Permian.

Saudi Arabia sells $12.5 billion in bonds. On Wednesday, Saudi Arabia sold $12.5 billion in bonds, the largest volume of debt issued by a sovereign country this year. It is also the third bond sale since 2016 for Riyadh, as the oil producer is struggling to plug budget deficits with low crude prices. The deficit, although down from the past two years, will still hit a whopping $53 billion this year.

Saudi Arabia threatened to quit OPEC. A Reuters report revealed that Saudi Arabia threatened to quit OPEC last year unless everyone signed on to production cuts. The aggressive move was made with Saudi Aramco’s IPO in mind – Riyadh desperately wanted higher oil prices to boost the valuation of the public offering. The IPO has turned Saudi Arabia, historically more cautious about pushing too hard to increase prices, into one of the most hawkish members on oil prices. The report highlights how drastically Saudi oil policy has changed under the leadership of the crown prince, and it also illustrates how central the Aramco IPO is to the country right now. Related: Oil Price Rally Accelerates Shale Boom In Argentina

Turkey reiterates Kurdish oil threat. Turkey’s Prime Minister reiterated a threat made earlier in the week by President Recep Tayyip Erdogan, warning Kurdistan that it would cut off oil flowing through Turkish territory in response to the Kurdish independence referendum. Turkey said that, in a departure from its previous policy, it would now only deal with Baghdad, rather than allowing Kurdistan to export oil on its own through Turkey. The tension has put some upward pressure on oil prices but so far actual oil flows have not been interrupted.

More Niger Delta attacks possible. Oil analysts are warning that the calm in the Niger Delta could be nearing an end. The respite from violence over the past year has allowed Nigeria to restore a lot of lost output, pushing up production to 1.8 mb/d. But with frustration in the Niger Delta palpable, risk analysts see it boiling over once again in the near future. "Militant groups are running out of patience, the government is unable to deliver on its promises, the president is a 'lame duck', and the umbrella group negotiating on behalf of the militants shows signs of disintegration," Malte Liewerscheidt , senior analyst at Verisk Maplecroft, wrote in a briefing. "All of this suggests that the current period of ostensible tranquility in the oil-producing Niger Delta could be over soon as the country heads towards elections in 2019." Obviously, this would have huge implications for the OPEC deal and for global oil prices.

By Tom Kool for Oilprice.com

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