Traders forecast the return of $ 100 crude

US Sanctions on Iran will keep oil prices from falling below US $65 and it may hit $100 according to traders. 

Background 

Trump denounced the Joint Comprehensive Plan of Action (or the Iran deal) which was signed by Obama and five permanent members of the United Nations Security Council during his campaign. He pulled out of the JCPA in May 2018, reimposing  economic sanctions on Iran effective from November 4th

The November sanctions are aimed at Iran’s port operators, insurance and reinsurance businesses and foreign purchases of Iranian oil. American officials have despatched teams of diplomats to persuade many nations - even China, Iran’s largest oil buyer - to cut Iranian oil purchases to as close to zero as possible. The sanctions reverberated through the global oil market. 

Analysis 

The world's biggest trading houses believes that  the oil prices are not falling below $65 per barrel and possibly breaking above $100 next year as US sanctions on Iran reduce crude exports from the Islamic republic. 

The US sanctions on Iran will come into force on Nov 4 and this will test the ability of Organisation  of the Petroleum Exporting Countries (OPEC) and others to fill the supply gap as shipments from OPEC member, Iran will decline.

Along with Iran, Venezuelan oil output also continued to fall, declining to 1.23 million b/d in September. It’s thought an estimated 1.5 million bpd will be taken off the markets on November 4 Last week, Brent crude last reached $86.74 a barrel, the highest since 2014.

Forecasters such as the International Energy Agency say that in 2019 emerging-market crises and trade disputes could dent global demand while rising non-OPEC production adds to supply. 

Jeremy Weir, chief executive of Trafigura, said at the Oil & Money conference in London that he would not be surprised to see oil trade at more than $100 per barrel next year. 

Alex Beard, chief executive for oil and gas at Glencore, said at the same event that he forecast a mid-term oil price of $85-90, as a release of US strategic oil stocks looked remote and would have limited impact anyway. He believes that the sanctions will be very tough and waivers will be limited. 

Traders expect oil storage tanks worldwide to start emptying amid reduced global supplies caused by sanctions against Iran as well as other factors.

Beard added that US infrastructure limitations would limit US crude exports that could otherwise compensate and the new refining capacity coming online in 2019 would add further tightness. 

The traders said, however, they expected some demand destruction in emerging market economies to help cap oil prices. The chief executive of Gunvor, Torbjorn Tornqvist, said he saw lower prices next year at $70-$75, citing a slowdown in demand growth and a well-supplied market. He said that Iranian exports are expected and the amount will depend on the price.” If oil goes up to $100 a barrel then waivers, if it stays around $80 a barrel then no waivers," Tornqvist said. 

Vitol and BP presented the most bearish views. Vitol Chairman Ian Taylor forecast a price of $65 a barrel. "We've knocked down our demand growth forecast this year and for next year. Will the US pipeline in the Permian (oilfield) manage to deliver a huge increase in the second half of 2019?" Taylor said. 

Russia increased its oil production in September to a post-Soviet record high of 11.36 million bpd. Saudi Arabia also raised production in September.  Concerns are focused on Saudi Arabia’s capacity to replace supplies from Iran, which currently heads OPEC in terms of oil production at 3.8 million barrels per day. Saudi oil production averaged 10.52 million b/d in September, up 100,000 b/d from August and the highest output level since November 2016. Total OPEC oil production is expected to average 32.46 million b/d in 2018.

When asked about China’s and India’s decision to export oil from Iran, President Donald Trump said that the US "will take care" of the countries which will continue to import oil from Iran after November 4 deadline when US sanctions on Iranian oil purchases take effect. 

Previously, President Trump had criticized and put pressure on the OPEC members to reduce the price of oil as the gasoline prices in  US have gone up ahead of November midterm elections. 

The EU has brushed off US sanctions on Iran, providing legal cover for energy companies which may fall foul of legal action from US authorities. Moreover, China has decided not to cooperate with US oil sanctions on Iran in light of the tariff war between the two giant nations.  

Assessment

Our assessment is that many emerging economies including India and China will bear the brunt of rising oil prices. We feel the US will  benefit substantially from elevated levels of energy prices as they are currently the number one oil exporting nation in the world. We also feel that  higher prices of oil  ( above 100 ) will induce more  infusion of capital into technology that is  needed to make deep sea drilling  viable.