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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The Bullish And Bearish Case For Oil

Oil tanker

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. Related: Oil Slips As U.S. Scales Back Confrontation With Russia

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. Related: Musk Blames Robots For Tesla Production Crisis

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.

By Nick Cunningham of Oilprice.com

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  • James on April 16 2018 said:
    Sorry, but the days of “explosive” shale growth are nearly over with, pipeline capacity is nearly full at 96% (new pipelines aren’t coming online until next year) and gas flaring is at it’s limits, the Permian Basin will have significant constraints coming into the second half of the year, all while these subconscious producers keep burning through their core acreage, this is a disaster in the making and Barclays should really get with the times before they’re left behind. Welcome to the new oil bull market folks!
  • citymoments on April 17 2018 said:
    I bet: So called those Barclay Ana-lysts have never been to any oil fields, thinking oil just like water, just turn the tap on if you need more of it. How real physical wealth is created? It is not created by a few DOTCOMS or face booking tech monsters, all wealth is produced by hard commodity and energy. Most mainstream experts are chasing and piling money over tech Giant like Amazon, it is over $1000 a share now; though they all over looked one important fact: Amazon is a highly fossil fuel dependent business, most of its revenues derives from goods shipped by sea and air, delivered to every household by trucks and vans. It is your life time chance, to make a fortune, out of this egregious ignorance on the importance of fossil energy by so many called mainstream incompetent experts.
  • Mamdouh G Salameh on April 17 2018 said:
    On balance, the bullish sentiments in the global oil market far outweigh the bearish ones. That is why a further oil price surge to $75 is more of reality now than a mere bullish projection.

    The bullish case is based on a robust global economy projected to grow this year and next at 3.9% per year, a fast-rising global demand for oil growing by 1.7-2.0 million barrels a day (mbd) in 2018 over 2017 and a virtually rebalanced oil market.

    The bearish case rests on claims about rising US oil production but the global oil market has been discounting these claims as more of a hype than reality. So they hardly impact oil prices.

    The global oil market has already factored in Geopolitical concerns as a constant factor in Middle East politics. So their impact will be limited unless they lead to a disruption of Saudi or Iraqi or Iranian oil.

    And contrary to claims by Colombia University’s Energy Centre that US sanctions could lead to a loss of 400,000-500,000 barrels a day (b/d) of Iranian oil supply, Iran’s oil exports will not lose a single barrel of oil simply because the European Union (EU) will not join US sanctions and impose sanctions on insurance companies insuring Iranian oil cargos. As for US sanctions on banking, Iran will bypass them by pricing their oil exports in the petro-yuan.

    OPEC and Russia will continue with the OPEC/non-OPEC production cut agreement well into the future in order to prevent a return of glut to the market.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Don on April 17 2018 said:
    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.

    I am a little puzzled why so many people think OPEC will ramp up production if prices go to high. Oil prices were solidly over $100/barrel from 2011-2014. During that period OPEC production fluctuated about 1.5 mbpd but overall stayed between 30-31 mbpd. Additionally….when oil prices were over $100/barrel from 2011 to 2014 demand grew 2.6 mbpd in 2011, 800k bpd in 2012, 2.0 mbpd in 2013 and 800k bpd in 2014. This idea that too high of oil prices will significantly reduce demand doesn’t really show up in the data from 2011-2014. It may start to slow demand growth but most likely that wouldn’t show up for few years after a price spike. OPEC is still producing pretty close to capacity. They have some spare capacity but just because oil hits $90/barrel doesn’t mean they will bring it on. Is OPEC worried about the next Shale Oil Miracle(which had U.S. production grow 4.5 mbpd over three years) if oil prices go to high? It still isn’t clear where the next Shale Oil Miracle is going to come from to meet future demand growth. It isn't going to come from conventional resources with cap ex cuts the last few years.
  • Kr55 on April 17 2018 said:
    There is certainly a bearish case forming for the super light oil coming out of the Permian now. The discount is getting worse for the oil coming from the Permian. No one wants it in the USA, international buyers are sensing the weakness and the desperation to export and getting some nice deals now, and the deals might just keep getting sweeter.

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