What’s Next For Oil Prices?

Oil prices rallied last week to their highest level since November 2014, with Brent Crude hitting $86 and WTI Crude rising above $75 a barrel at one point in the middle of the week.

Uncertainty has been the buzzword in the oil market over the past couple of months. On the supply side, there’s uncertainty about how much Iranian oil the United States will manage to choke off. Then there’s uncertainty about how much spare capacity Iran’s fellow OPEC members and non-OPEC Russia could summon on short notice to replace Iranian losses. Finally, on the demand side, there’s uncertainty whether oil prices at four-year highs and consequently, fuel prices at multiple year highs, are already denting oil demand growth, especially in emerging markets, which are key oil demand drivers but which have suffered a major depreciation of their currencies against the U.S. dollar over the past two months, making the oil they buy even more expensive.

And then there is the speculative positioning that hedge funds and other money managers have been taking in recent weeks, amassing bullish bets amid fears that the U.S. sanctions on Iran could remove as much as 2 million bpd from the oil market in less than a month’s time.

While oil prices rallied to four-year highs last week, Saudi Arabia and Russia started to assure the market that they have indeed raised their respective oil production in recent weeks, in line with the OPEC+ agreement from June.

The most recent oil price move higher began after an OPEC panel at the end of September didn’t recommend any immediate production boost, snubbing demands from U.S. President Donald Trump that the “OPEC monopoly must get prices down now!”

The inaction by OPEC and Russia at the end of September—and the growing evidence from tanker tracking data that Iran’s oil exports have started to fall quicker than most market participants had been expecting—has emboldened bulls, and some analysts started to predict that the possibility of $100 oil as soon as year’s end is not to be ruled out.

Hedge funds and other money managers started to bet on rising prices again, and they did so in Brent in five consecutive weeks. Until last week, when longs on Brent dropped for the first time in six weeks. In the week to October 2, the net long position in Brent Crude dropped by 2.9 percent, after a 53-percent surge in the previous five weeks, according to Bloomberg estimates on ICE Futures Europe data. The number of longs declined by 1.5 percent, but more significant was the number of shorts soaring 24 percent in the week to October 2, the most since May.

“Cooler heads are starting to prevail,” Ashley Petersen, a senior oil market analyst at Stratas Advisors, told Bloomberg last week, commenting on the money managers’ wagers on oil prices.

Just as Brent Crude hit $86, Saudi Arabia hastened to inform the market that it is currently pumping 10.7 million bpd—just shy of its all-time record high of 10.72 million bpd from November 2016—and could even tweak that 10.7 million “slightly higher” next month.

Russia has already reversed all 300,000 bpd cuts it had pledged in the deal with OPEC, and added another 100,000 bpd production in September, Russian Energy Minister Alexander Novak said last week, but noted that in a very nervous and emotional market with a lot of uncertainties, he can’t rule out oil prices hitting $100 a barrel.

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Higher prices will not be good for consumers, as Novak and all oil officials are aware. In addition, the U.S. dollar strength is making oil even more expensive in oil-importing countries outside of the U.S. (not that gas prices in the U.S. are low—they rose in early October to levels last seen in mid-July).

Due to the dollar strength, current oil prices in euros, yen, and Indian rupees have already risen to levels that had started to lead to demand slowdown in the past two cycles in 2008 and 2013, according to estimates by Reuters market analyst John Kemp.

So far this year, demand has held strong, despite expectations that higher oil prices would start to weigh on demand growth.

JP Morgan had expected demand growth to moderate this year, but so far demand has been “relatively robust,” Scott Darling, regional head of oil and gas research at JP Morgan Chase, told Bloomberg on Monday. For next year, however, JP Morgan sees demand growth at 1.1 million bpd, lower than the Street’s view of 1.5 million bpd.

The market will continue to react to “supply-driven risks”, according to Darling, who also pointed to two of the key uncertainties on the supply side—the world’s actual spare capacity and Saudi Arabia’s actual ability to “really turn up the taps” this winter.

Persisting uncertainties on both the supply and demand side are making the market and participants jittery. Oil prices could be more vulnerable than usual to hints, news, and comments until the U.S. sanctions on Iran return in four weeks.

By Tsvetana Paraskova for Oilprice.com

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