The oil price rally was halted early on Tuesday as concern over the Syria conflict escalating somewhat eased and U.S. shale production continued to grow.
On the one hand, the geopolitical risk premium is definitely back in oil markets this year, and according to market participants and analysts, it will not be going away anytime soon.
Fears that the Syrian conflict could spread across the Middle East, the possibility of renewed sanctions on Iran, and Venezuela’s oil production in freefall have been supporting oil prices lately. The ever-tightening oil market has accentuated these concerns, increasing oil price volatility.
On the other hand, the U.S. EIA said in its monthly Drilling Productivity Report on Monday that U.S. shale production is expected to increase by 125,000 bpd in May over April, with the Permian production surging by 73,000 bpd, Eagle Ford’s by 24,000 bpd, and the Bakken’s by 15,000 bpd.
While geopolitical issues have dominated the oil market in the past week, traders will also be looking at the API stockpiles data later on Tuesday, and the EIA’s inventory report on Wednesday.
The geopolitical concern over conflicts in the Middle East will not be going away in the short term, Michael Cohen, head of energy commodities research at Barclays, says. Syria, Yemen, and Iraq - with parliamentary elections next month - are the hot spots that could boost oil prices should conflicts escalate. Then there are the Iran-U.S. and Venezuela issues that could also add to the geopolitical risk premium in oil markets. Related: New Sanctions On Russia Could Lift Oil Prices Further
“All of this is going to add to headline risk at the very same time that we’re gearing up for the driving season,” Cohen told CNBC, noting that Barclays sees plenty of upside pressure for oil prices in Q2.
However, later in the year, oil prices may face a correction as U.S. production continues to surge. The market has already priced in the potential of renewed sanctions on Iran as well as a further Venezuela production drop. According to Barclays, the oil market will tip into surplus in the last few months of 2018 and remain oversupplied through 2019.
By Tsvetana Paraskova for Oilprice.com
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