'Pandora's box' could unleash $US100 oil, analysts say
Analysts are nervous about supply in oil markets.
by Sarah Turner
The US has taken a fighting stance on global trade, but there's another US policy agenda that has oil markets worried and analysts saying $US100 a barrel oil is once again in sight.
Washington hardened its stance on Iran's nuclear capabilities in early May and intends to introduce sanctions against Iran from November 4. It has also told allies that they should stop buying Iran's oil. Iran's Vice-President Eshaq Jahangiri told Reuters on Tuesday that the US was trying to cut Iran's oil sales to zero at the same time as he vowed Iran would "sell as much oil as we can".
However, production from Venezuela and Libya is in doubt and as the Iran sanctions deadline approaches, analysts are considering what the the total loss of Iranian production could do to the oil price.
There's a view in the market that the oil price is stabilising at higher levels, said Romano Sala Tenna, portfolio manager at Katana Investments. "Sentiment has turned," he said.
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"People are starting to rework their models," adjusting for a higher oil price, he said. The fund manager likes Woodside and Santos in the Australian energy space.
Tensions are rising in the run-up to the November sanctions deadline, with Iran's oil minister Bijan Namdar Zanganeh walking out of the latest OPEC meeting on June 23 saying Donald Trump was to blame for high oil prices.
Before the meeting, Mr Trump accused OPEC producers of inflating costs. "Hope OPEC will increase output substantially," Mr Trump posted on Twitter after the meeting concluded. "Need to keep prices down!"
But oil continues to hold around three-year highs and Mr Trump produced another angry missive over the weekend. OPEC is "doing little to help", he fumed. "If anything, they are driving prices higher as the United States defends many of their members for very little $'s. This must be a two way street. REDUCE PRICING NOW!"
Brent crude is currently trading at $US78.06 a barrel while West Texas Intermediate crude is at $US73.55 a barrel.
At first glance, production trends appear favourable for a lower oil price. US production is surging with the US on track to become the world's leading producer, according to the US Energy Information Administration.
And the Organisation of Petroleum Exporting Countries and allies including Russia pledged at their June meeting to boost oil productionfrom July in an effort to counter high oil prices.
There's also the option of opening up strategic petroleum reserves to meet demand from a relatively robust global economy.
Still, "No one ever thought the Trump administration would consider zero exports from Iran," said Fereidun Fesharaki and James Davis at Facts Global Energy in a report.
"On the contrary, given the administration's desire for lower prices for the mid-term elections, we thought a ceiling of 1.5 million barrels a day may be imposed and progressively reduced to 1 million barrels a day or less over some period of time after the sanctions kick in."
There "is not enough capacity to make up for Iran's crude losses, plus Venezuela and Libya", they wrote. "Any additional supply shocks will send prices through the roof. Trump is opening Pandora's Box, inside he will find US$100 a barrel oil."
Bank of America Merrill Lynch analysts flagged the potential for $US100 oil in late May.
"If output from Iran and Venezuela drops by 1.6 million barrels a day from current levels, or 1.15 million barrels a day more than our baseline forecast, naturally Brent crude oil prices would push much, much higher.
"A worst-case scenario built around Iran and Venezuela with no supply offsets from other countries could shift our 2019 average Brent crude oil forecast from $75 to more than $100 a barrel," they said.
Morgan Stanley commodity analysts this week lifted their forecast for Brent crude to $US85 a barrel for the second half of 2018, from a previous forecast of $US77.50 a barrel.
"We see lower output from Iran, Libya and Angola ahead, but increase our forecasts for Saudi Arabia. On balance, this leaves the oil market tighter than before, with less spare capacity."
SXY Price at posting:
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