Complex Made Simple

Here’s what’s keeping oil prices high, what could take them up to $90 or down to $50

A possible US recession, Iran war scenarios, OPEC are main issues to watch for when deciding the price of oil

Brent crude was 23 cents short of $73.40 reached last April 26 The purpose of the attacks appears to be “to illustrate that it is not just the Strait of Hormuz that is under threat economic models suggest there is a 50% chance of a U.S. recession over the next 12 months

Brent crude traded at over $73 earlier today and was still at that level at the time of publishing. Where are prices heading?

OPEC has the say for now

Saudi Energy Minister Khalid al-Falih announced on Sunday that OPEC’s majority did not see the need to ease production cuts but he would remain responsive to the needs of a “fragile market.”

Reuters reported that UAE Energy Minister Suhail al-Mazrouei told reporters earlier on Sunday that producers were capable of filling any market gap and that relaxing supply cuts was not “the right decision.”

Brent crude was 23 cents short of $73.40 reached last April 26 and US WTI was just $10 back at $63.58 a barrel.

On Friday, West Texas Intermediate crude settled at $62.76 a barrel, while Brent crude finished at $72.21.

Supply-demand risks 

U.S. President Donald Trump threatened Tehran on Sunday that a war would be the “official end” of Iran, but later expressed hope that avoiding war would be best.

Middle East tension has supported propped prices. Recent actions such as armed-drone attacks at a key Saudi oil pipeline and a sabotage attack that damaged two Saudi oil tankers off the eastern coast of the United Arab Emirates, near the Strait of Hormuz, highlight existing tensions.

Both incidents were blamed on Iran proxies.

MarketWatch pointed at threats to both global supplies and demand as being behind market volatility.

The purpose of the attacks appears to be “to illustrate that it is not just the Strait of Hormuz that is under threat,” said James Williams, energy economist at WTRG Economics, as reported by MarketWatch.

“Both the pipeline and the U.A.E. province on the Gulf of Oman are facilities that allow crude to bypass the Strait of Hormuz.”

Iran threatened to disrupt the flow of oil through the strait, following the U.S. decision to fully implement sanctions against Tehran.

The International Energy Agency says that daily Iranian exports of crude and condensates in April fell by 320,000 barrels, to 1.3 million.

However, there has been some price weakness recently, as the U.S.-China trade war has raised concerns about a potential drop in energy demand.

‘With the current situation with Iran and the China-U.S. trade issues, the only thing we can forecast with certainty is volatility for oil prices.’ James Williams, WTRG Economics

What will OPEC decide to produce next June?

Saudi Arabia and Russia are discussing two main scenarios for a meeting of OPEC and its oil-producer allies June 25-26 in Vienna, and both frameworks propose increased crude output from the second half of 2019, two sources familiar with the matter told Reuters. 

“Russia wants to ease the cuts of 1.2 million barrels per day (bpd) being carried out by the so-called OPEC+ alliance,” the sources said. 

The sources said, “OPEC’s first scenario was to eliminate over-compliance with agreed cuts, which would mean increasing output by around 0.8 million bpd.” 

OPEC and its allies are effectively curtailing production by close to 2 million bpd. 

“Another option is to ease the agreed cuts from 1.2 million bpd to 0.9 million bpd, which would mean raising output by some 0.3 million bpd,” one source said. 

Oil price expectations + or – $15

The market is “underpricing Iran risks,” according to Bank of America Merrill Lynch.

 “Global oil demand growth has decelerated sharply in recent months, averaging just 680,000 bpd in the past two quarters compared to trend demand growth of 1.46mn bpd in the past 5 years,” Bank of America Merrill Lynch wrote in a note to clients.

The US-China trade war could make things worse.

Tariffs have impacted “some pockets of the global economy,” Bank of America said.

As the bank notes, economic models suggest there is a 50% chance of a U.S. recession over the next 12 months. Others think the odds are 30% for a recession.

 “There is a risk that a large portion of the speculative community will nervously rush out of their positions if chances of a US recession increase again,” Bank of America warned.

“In a global downturn, Brent could slip to $50/bbl,” the bank’s analysts wrote.

“On the other hand, under a US-China deal scenario, business confidence may return with a vengeance, resulting in a weaker USD and stronger global growth. If a cyclical global demand upturn coincides with an IMO2020 boost, Brent crude oil prices could spike to $90/bbl.”

From January 2020, the International Maritime Organization (IMO) will ban ships from using fuels with a sulfur content above 0.5%, compared with 3.5% now.