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The Perfect Storm That Could Drive Oil Even Higher

After rallying more than 30 percent year to date, oil prices could be set for a further upside in coming weeks as a combination of near-term bullish supply-side factors could push prices higher than current levels.

Over the next few weeks, several critical geopolitical events could set the trend for even higher oil prices in coming months. These events, combined with a tightening global oil market, could leave prices vulnerable to any sudden supply outage on top of the production cuts by OPEC and its Russia-led non-OPEC allies.  

Experts who have recently spoken to CNBC recognize the fact that the oil market may be set for a major disruption on the supply side, although they diverge on who the single biggest disruptor may be.

The three top candidates are Iran, Venezuela, and Libya. All three OPEC producers were exempted from the cartel’s production cuts that began in January and are expected to last at least until June. And all three have shown so far this year that there was good reason to be exempted—their respective production has been either falling or volatile, and set for further disruptions in coming weeks and months.

According to Stephen Brennock, an oil analyst with PVM Oil Associates, it’s Libya that will pose the biggest geopolitical risk to oil markets.

Eastern strongman General Khalifa Haftar ordered earlier this month his Libyan National Army (LNA) to march on the capital Tripoli. The self-styled army has been clashing with troops of the UN-backed government in a renewed confrontation that could escalate and threaten to disrupt, once again, Libya’s oil production and exports.

“Oil production in the country has yet to be disrupted however I suspect it is a matter of when not if. General Haftar and his eastern Libyan forces are determined to seize Tripoli and with it comes the inevitable risk of supply outages,” Brennock told CNBC in an email.

Cailin Birch, global economist at The Economist Intelligence Unit (EIU), believes that it’s Iran and the U.S. sanctions on its oil industry that is the most important supply-side issue. The unpredictability of the U.S. Administration’s policy could result in the U.S. cutting off waivers for Iranian oil customers due to expire in early May, Birch told CNBC.

Many other analysts, however, believe that the U.S.—despite its continued talk of “maximum pressure” on Tehran and “zero exports” from Iran—will be more lenient, again, toward the key Iranian oil buyers. The reason—fear of driving oil (and gasoline) prices too high.

Some analysts say that with the focus on tightening the sanctions on Venezuela and Nicolas Maduro’s regime, the U.S. could go softer again on Iranian customers, because those two supply disruptions combined, plus a possible outage in Libya, could tighten the market too much and result in oil prices overshooting.

Related: Oil Could Fall To $40 If OPEC Abandons Its Deal

“This may turn out to be a black swan event as it would force the OPEC+ alliance to reopen the oil spigots,” Brennock tells CNBC.

Speaking of a black swan event, Goldman Sachs’ head of commodities research Jeff Currie told CNBC earlier this month that such an even would more likely be economic and monetary policy changes in a major economy, such as China or the United States.

Goldman Sachs is one of the investment banks that don’t see oil prices reaching $80 a barrel as they did in Q3 last year because there’s only modest upside to price gains.  

Citigroup, however, sees more upside than downside in oil prices.

Bank of America Merrill Lynch says “the risk of a Brent crude oil price spike is significantly higher than options markets suggest,” as the new regulations by the International Maritime Organization (IMO) to cap the sulfur content in ship fuel are bound to further disrupt the oil and refining markets by the end of this year.

“Crude oil’s near-40% rally from the December low has resulted in both WTI and Brent clawing back half the losses seen between October and December. With global demand growth holding up despite the prospect for lower global growth, the market has instead been left to focus on a near-perfect storm of price-supportive supply news,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in the bank’s Q2 2019 Quarterly Outlook.

“With Opec+ continuing to cut production and the US forcing down exports from Iran and Venezuela, only a major change in the outlook for demand will alter the current positive sentiment,” Saxo Bank’s expert noted in early April.  

Saudi Arabia and several other OPEC producers need oil prices above $80 for budget purposes and are unlikely to be happy with only $70 a barrel Brent, Hansen said, adding:

“On that basis, we expect supply to be kept tight over the coming months, thereby supporting a potential extension towards $75/b before it eventually runs out of steam amid renewed concerns about the negative impact to global growth.”  

By Tsvetana Paraskova for Oilprice.com

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Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More

Comments

  • Robert Berke - 22nd Apr 2019 at 1:19am:
    Oil prices surged on Monday amid reports the U.S. will announce the end of waivers for countries to import Iranian oil, as part of a bid by the Trump administration to push Iran’s exports to zero.By
    Barbara
    Kollmeyer
    CNBC Markets reporter
  • Robert Berke - 22nd Apr 2019 at 1:28am:
    Brent crude futures surged more than 3 percent to over $74 per barrel on Monday morning during Asia hours, while U.S. crude futures rose around 2.67 percent to $65.71 per barrel.

    That price spike followed a report by the Washington Post, citing two unnamed State Department officials, that U.S. Secretary of State Mike Pompeo will announce that “as of May 2, the State Department will no longer grant sanctions waivers to any country that is currently importing Iranian crude or condensate.” Condensate is an ultra-light form of crude oil.

    Following that report, Reuters confirmed the news, citing a source familiar with the matter.
  • George Kafantaris - 22nd Apr 2019 at 2:03am:
    Though imposing oil sanctions will punish Iran, they will also punish our economy.
    Who will gain?
    Saudi Arabia will -- as will Russia that can now unload its oil for cash.
    Will Israel gain too?
    Netanyahu and Trump sure hope so.
    But it’s not clear that our country will gain. Overuse of sanctions -- like all power -- can render them useless. By the time our president is done sanctions will lose their sting as other countries band together to resist them -- or devise ways around them.
  • Mamdouh Salameh - 22nd Apr 2019 at 3:20am:
    Oil prices don’t need a perfect storm to drive them higher. They are headed up because of a convergence of bullish influences currently at play such as a strong global oil demand adding 1.45 million barrels a day (mbd) this year over 2018, rock solid Chinese oil imports projected to hit 11 mbd this year, a Chinese economy growing at 6.4% this year beyond the projected 6.3%, a confirmed slowdown in US production and a tightening global oil market caused by OPEC+ production cuts.

    If these bullish influences stay with us this year, the chances of oil prices going beyond $80 a barrel are very credible.

    Still, bullish influences in the global oil market will have to battle some bearish factors at play, namely the failure of US sanctions against Iran’s oil exports and Venezuela’s ability to keep some sort of normality in its oil production despite US sanctions.

    The glaring fact facing the Trump administration is that US sanctions against Iran’s oil exports have yet to cost Iran the loss of even a single barrel of oil.

    To renew or not to renew the sanction waivers is the crucial question facing the Trump administration. However, the global oil market has made the decision for the Trump administration.

    President Trump has no alternative but to renew the sanction waivers he issued last year to the eight biggest buyers of Iranian crude when they expire in May or issue new ones for no other reason than to use them as a fig leaf to mask the fiasco that US sanctions have failed and also the fact that the zero exports option is a bridge too far.

    Iran’s oil exports estimated at 2.125 mbd have been going to China (31%), India (28%), the EU (20%) and Turkey (7%), a total of 86%. The remaining 14 % has been going to Japan and South Korea. The above countries with the exception of South Korea and Japan don’t recognize US sanction on Iran and would continue to buy Iranian crude with or without sanction waivers.

    With waivers, South Korea and Japan may have to reduce their purchases by 20% or 60,000 barrels a day (b/d). Without waivers, they may have to stop importing some 300,000 b/d. Either way, the drop in Iranian oil exports ranging from 60,000-300,000 b/d will be offset by increased purchases from China, India and Turkey.

    Actually, the renewal or non-renewal of the sanction waivers will hardly impact oil prices or global supplies. However, non-renewal of the waivers will expose the failure of the sanction to the world. That is why the Trump administration will bite the bullet and renew the waivers.

    Meanwhile, Venezuela has managed to keep its oil production virtually steady despite US sanctions. Moreover, the global oil market has already factored in a steady decline in Venezuela’s oil production long before sanctions came on the scene.

    The impact of the political turmoil in Libya on oil prices will be negligible since the global oil market has already factored in Libya’s oil production disruptions as a result of continued instability in the country.

    Libya’s oil production has been at the edge of collapse since 2011 with oil production ranging from an estimated 300,000 b/d in 2011 to almost 1 mbd in 2018 with most of the major facilities, oilfields and exporting terminals disrupted from time to time.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • bob bobert - 22nd Apr 2019 at 10:09am:
    High oil, low economy....basic economics. We are in for another regression if oil continues to rise. The oil economist is wrong....again....
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