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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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What Is Keeping Oil From Breaking $70?

Oil

The protests in Iran have helped push oil prices up to fresh multi-year highs this week, but a lot of questions remain about the durability of the oil price rally.

Repeated and ongoing protests in various cities around Iran has raised questions about a possible disruption of supply, which, to be sure, remains highly unlikely. But the needling from the U.S. President’s Twitter account added fuel to that fire, helping to keep the price rally going.

The war of words probably makes it even more likely that Trump will take a rather dramatic move in less than two weeks when he faces the latest deadline over deciding on Iranian sanctions. Every three months, the U.S. President must waive sanctions on Iran related to the 2015 nuclear agreement (authority given to him per U.S. law, not the international agreement).

Trump decertified the nuclear deal in October, but it was only a partial move given that he declined to re-impose sanctions. We are now nearly three months on from that decision, and most analysts expect Trump, egged on by the unrest in Iran, to take that fateful step of bringing back sanctions. Related: Is A “Geopolitical Recession” Looming?

That will certainly lead to more tension between the two countries, but it is highly unclear how this ends. As Liam Denning writes in Bloomberg Gadfly, Iran could be one of the biggest wildcards for the oil market in 2018. A serious disruption of Iran’s 3.8 million barrels of daily oil production remains remote, but not impossible.

That tail risk is likely driving the recent increases in oil prices, pushing WTI well into $60-per-barrel territory and Brent near $70, an unthinkable proposition until only recently.

Nevertheless, there are still some pitfalls to the current oil price rally, not the least of which is a massive buildup in bullish bets on oil futures from hedge funds and other money managers. Bets on rising oil prices hit a record high at the end of 2017, and the optimism likely carried into the first week of the year. At the same time, short bets fell to a nine-month low, according to Bloomberg.

But with so many investors piling into one side of this equation, the positioning is starting to look overstretched, particularly with the recent run up in prices. U.S. shale production is still growing at an impressive rate – and the EIA just reported a 170,000-bpd increase for U.S. oil production for the month of October, indicating a strong shale response to higher oil prices.

Most analysts see inventories rising in the first half of 2018, which, to be sure, is typical for the time of year, but would still delay the effort to take inventories down to the five-year average. The inventory surplus could very well disappear at some point in the second half of the year, but that is quite a ways away.

Related: Will Oil And Gold Prices Rise This Year?

In other words, investors are bidding up prices even as the underlying fundamentals point to questions regarding the balancing process. Oil might push higher as inventories fall, but in the near-term there is downside risk to prices. Moody’s Investors Service said on January 2 that oil prices will probably bounce around in a range between $40 and $60 per barrel for much of this year.

The risk is that with so much money currently going long, a bit of negative news sparks a sudden selloff. “The expectation is that the rebalance will continue,” Gene McGillian, a market research manager at Tradition Energy, told Bloomberg. “We’ve approached an area where we really need to see a steady diet of positive information.”

Trump could yet provide that bump to oil prices if he steps up confrontation with Iran. “Beyond the recent focus on street protests, the potential reinstatement of US sanctions targeting the Iranian oil industry remains an issue,” JBC analysts said, according to the FT.

But it is always a gamble trying to predict what Trump will do.

By Nick Cunningham of Oilprice.com

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  • Yokic@net.com on January 04 2018 said:
    I thought it was about significant inventories draw week after week all around the world.Now I am reading it is not about inventories,it is about unrest in Iran or Libya or Nigeria.....and every day we can expect collapse on oil market despite inventories has been drained not only as per API as well as per EIA or OPEC....
  • Gary Novak on January 04 2018 said:
    Cunningham says most analysts expect Trump to bring back sanctions against Iran. And Cunningham agrees: Trump's needling of the Iranians makes it even more likely that he will "take a rather dramatic move" with regard to sanctions in less than two weeks. But he also says that a possible disruption of Iranian supply remains highly unlikely. That implies that sanctions have little effect on supply. Then why should the implied threat of sanctions help to keep the price rally going?
  • Neil Dusseault on January 04 2018 said:
    @Yokic:

    Yes, as per both API & the EIA (as well as OPEC) the inventories are drawing down...this week marks the 7th consecutive week of oil draws but also gasoline builds.

    As expected, there are many factors driving up the price of oil...the unrest in Iran is the most prominent, but before that there was a disruption in supply from Libya as well as the Forties pipeline (which mostly affects Brent prices first). Then there is the declining U.S. dollar, not to mention hedge funds mostly on the long side of the market.

    With that many people on the buy side, that means that the only trading that can happen at that point is selling, and it triggers a cycle of massive sell-offs. Also, don't lose sight of the fact the U.S. is producing at near-record levels (and about as much as Saudi Arabia & Russia).

    So, even with draw-downs in oil supply, the U.S. is exporting as much as anyone which just goes to show how quickly those supplies can be brought back up--and even more production will occur if prices continue to rise.
  • Mamdouh G Salameh on January 05 2018 said:
    In 2017 analysts kept asking why the oil price is not breaking through the $60/barrel barrier. And the answer they were receiving was that US shale oil production is capping the oil price. But the oil price did manage to break through $60/barrel in 2017.

    The same question is being raised again as to why the oil price is not breaking through the $70/barrel level. The price will go beyond $70/barrel in 2018 underpinned by positive fundamentals in the global oil market. The US shale oil production will no longer be able to cap the oil price.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Me on January 05 2018 said:
    There's little, if any, geopolitical risk in the current oil price. It's merely reflecting supply and demand...as is obvious from Art Berman's comparative inventory plot.

    If the market decides to factor a war in the ME into the oil price, we'll be above $100/bbl in a heartbeat....
  • Paul on January 05 2018 said:
    The forest view suggests two factors are in play and if either of the factors disappear, the price will decline.

    1. Demand is increasing globally.

    2. Oil producers around the world are united to lift prices.

    All this ends with the central banks cranking up interest rates and eventually triggering a global recession sometime after 2020.
  • Don Westlund on January 05 2018 said:
    Nick…I appreciate the article but I think Iran is having a minimal impact on prices. It is all about inventories. We don’t have good and timely data on global inventories. We have pretty good data for the U.S. using EIA data but not globally. I have asked many people over the last few years about this and the consistent answer I get is that there isn’t good data. So what we tend to do is use EIA data and extrapolate that to the world. The current narrative is that U.S. inventories will start to increase because of more shale production and reduced demand because of the time of year thus pushing down oil prices. Inventories will most likely build in the U.S but what is going on outside of the U.S. Will we see global inventories start to rise? This is the key to where oil prices will go. If you have any data on global inventories…I would love to see it.
  • Disgruntled on January 05 2018 said:
    For the last 3 years all we've heard is prices won't recover until crude inventories decline to the glorious 5-year average. I looked at the EIA's data on stocks which goes back to 1983. For decades the stocks wavered north of 300 million barrels and south of 350 million barrels. In 1983, global demand was approximately 60 million bopd. By the end of 2018 it will most likely hit 100 million bopd. Don't you think we should increase the amount of stocks by a similar percentage as demand has grown? You know, just to insure that the global petroleum system can spit out 100 million bopd, EVERY DAY?!!
  • Dinesh Kumar on January 06 2018 said:
    Seems Dr Salameh and others are trying to simplify whats not simple.
    1. OPEC : OPEC is an oligopoly. It represents vested interests of its members. Keeping oil prices high and make more money as well as ensure investments in alternate fuel die. So oil will have 2 year high and low cycles
    2. Disruptions: Disruptions and production cuts are only short time markers within this long term cycle.
    3. Russia: Russia is the new king of energy. Russia has enough oil and gas to single handedly disrupt the equation.
    4. Shale gas: shale gas requires heavy investing and oil above 60. As soon as Shale gas projects take off opec will start easing production constraints. Lets understand that many of these economies are so oil dependent that they will produce adequate oil even at $20 a barrel.. And US has become a strong balancing factor on its agenda of destroying middle east stability. However Trump the businessman and my premise that he has a strong oil lobby means US oil interest would not allow US to kill oil prices.
    5. Iran, pipelines etc..: Such news just adds fuel to fire..OPEC production limits are not daily or monthly and short period issues dont really cause any demand supply forces only fuel speculation.
    6. Markets are more akin to commodity bourses than actual demand supply. US is a big player here but OPEC has learnednsome tricks too... But in such markets people join hands for ulterior motives.
  • Jeffrey J. Brown on January 10 2018 said:
    In mid-2017, Neil Dwane, with Allianz Global Investors, prepared a report in which he outlined "Five reasons to expect higher oil prices." The five reasons are listed below.

    Note that Brent averaged $46 in June, 2017, and Brent currently is at $69, up 50% from the mid-2017 monthly price and closing in on the $70 mark.

    Five Reasons to Expect Higher Oil Prices:

    1) Global oil demand is reassuringly stable

    2) Multiple factors will constrain the oil supply

    3) New discoveries are dwindling

    4) The US shale industry has problems

    5) Domestic production is falling in a booming Asia

    Note that Mr. Dwane references Mexico as a point of concern, but Mr. Dwane did not get into Mexico's problem with net oil exports, and there is a good chance that Mexico's net oil exports will drop by about half from 2016 to 2017.

    In any case, Mr. Dwane was interviewed on CNBC in July, and he made the following points:

    There's still a major reason why oil could jump back to $120, experts say

    http://www.cnbc.com/2017/07/07/theres-still-a-major-reason-why-oil-could-jump-back-to-110-experts-say.html

    Excerpt:

    Oil supply could easily be threatened by geopolitical risks, and such a disruption could cause oil prices to skyrocket, experts tell CNBC.

    Neil Dwane, global strategist and chief investment officer of European equity at Allianz Global Investors, warned that oil production supply is looking threatened around the world.

    "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," he told CNBC's Squawk Box on Friday.

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

    Dwane said geopolitical risks could cause prices to skyrocket as several oil producing states are fragile, and oil prices are currently too low for anyone to want to drill fresh wells which may be needed in the future.
  • the masked avenger on January 11 2018 said:
    The market is over-suplied, 120 a barrel oil destroyed the economy, it will take less now.
    Alternative energy is to far along to stop. Battery power and storage gets better daily. Oil demand will not continue to rise and the writers out here know that and it scares them greater. Oil isn't going away, but high prices only make alternatives cheaper to develop and come to market sooner. The game is up.
  • John Brown on January 11 2018 said:
    Let's hope that oil does go to $70. There's no reason for it to be above $4$0 right now, except speculation and market manipulation with the entire industry and support industries in on the game. The world still has a glut of oil sloshing around. OPEC/Russia have millions of barrels sitting idle, strategic reserves are full, and at over $50, and $64 for WTI today U.S. production is roaring and will outstrip all projections. If oil is manipulated to $70 a barrel that's great for the USA. The oil industry pays high wages, with renewables creeping up in market share and getting cheaper, $70 a barrel oil keeps them well in the game, especially with their subsidies, and the more market share the more they can keep dropping in cost/price.
    Let's hope the industry keeps manipulating the price higher. Sooner or later supply and demand will win, and there is plenty of supply out there, and growing.

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