After Brent crude oil pushed through the psychological level of $80 per barrel early Thursday, there are once again whispers of $100 oil. Does this rally have further to run? Can oil hit $100?
With the price now 2.5 times higher than at from the nadir in 2016, the steady recovery in the price of oil has been driven by supportive fundamentals and geopolitics. Fundamentally, supply is tightening parallel to demand increasing. Solid global growth lifted global oil consumption by 1.6% last year; demand started to pick up again just as supply was being tightened by a range of factors.
Three main factors Influencing Oil Prices
Firstly, the implementation by an OPEC led group, including Russia to cut production has almost eliminated the problematic supply glut. Whilst these cuts were initially intended as short-lived measures, they were extended last November. Questions remain over how and when OPEC will look to end these measures, which have been propping up the market. We don’t see OPEC rushing to bring the measures to an end, and that should keep oil well supported.
Venezuela has been producing half a million barrels less per day over the past year amid its ongoing economic and political crises, which is causing the collapse of the oil industry. Following a snap election on Sunday, rumoured to be rigged and unfair, oil traders are looking to see how the US will respond – talk of sanctions aimed at the oil industry are a real possibility. This in conjunction with the continued collapse of the Venezuelan oil industry would only boost the price of oil further making $100 an achievable target.
The most recent step higher for Brent, a rally of just around 10% in just over 2 weeks has come on the back of the US withdrawal from the Iran nuclear deal, and it reimposing sections aimed at the Iran oil industry. Regarding the sanctions, it’s still unclear how many countries and companies will comply with the sanctions and that uncertainty continues to push oil northwards. Next, we expect to see the US use trade negotiations to persuade China to reduce its Iranian oil imports. In this scenario we can expect oil prices to trend higher. On the other hand, should China deepen its energy ties with Iran, or keep them constant then we could expect the price oil to dip lower as the premium of the Iran announcement wears off.
Constraints On Rising Prices
Whilst the forces boosting oil higher are strong there are a several factors which are working against the rising price of oil could prevent a meaningful move towards $100.
1) Increasing US production
As the price of oil increase, US shale drillers are responding. Just last week 10 new US rigs were deployed taking the number of rigs to its highest level in three years. Production levels are exceeding expectations and has the potential to limit the rally in the price of oil. Investors will watch Friday’s Baker Hughes rig count closely; another strong reading could see Brent give back some recent gains.
2) Global Demand
Whilst global demand has been on the increase, a report by the EIA has warned that the price spike from the double supply shortfall from Iran and Venezuela will restrain oil demand. Interestingly, oil dipped lower on the news before shrugging it off and charging higher. This market response indicates that it is not something that traders are overly concerned about right now.
3) Strengthening Dollar
Given the inverse relationship between the dollar and oil, under normal circumstances we would expect the price of oil to come under pressure from the strengthening dollar. Yet the breakdown of this correlation and subsequent (and most likely temporary) positive correlation between the two prices, begs the question if oil can rally hard on a stronger dollar, any fall in the greenback could send oil surging.
As Brent is in line for a weekly gain of over 3%, its 6th consecutive weekly increase, it’s fair to say that the bulls are clearly driving the oil market. Given the double supply shortfall, fundamentals are still very supportive of this rally having further to go. However, with CFTC data showing speculators cutting back on their very bullish positions for three straight weeks, we could be looking at a period of consolidation before another move higher. Should the supply shortfall factors continue, and OPEC keep the cuts in place across the year, then oil to $100 looks to be a real probability.
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