EMEA News
Saudi/Iran Conflict Causes Speculation of $200 Oil But Fails to Offset Effect of IEA Demand Forecast Downgrade
Geopolitical tension has of late been cited as the potential driver of higher crude prices, but rising tensions between Saudi Arabia and Iran on Tuesday merely caused more speculation of skyrocketing prices - and zero impact on market performance.
Writing in CNBC, Steven Kopits, managing director, Princeton Energy Advisors, observed that "Events appear to be spinning out of control in the Middle East, and the threat a Saudi-Iranian war is looking increasingly credible" due to Houthi rebels in Yemen launching a missile targeting a Saudi airport near Riyadh over the weekend and the Saudis reserving "the right to respond."
Based on numbers from past conflicts, Kopits believes a war would remove 20 percent of the world's oil supply from the market and "would push oil prices into the $200 per barrel range."
If nothing else, the Saudi/Iran tension is causing oil options traders to mobilize: Bloomberg reported that the equivalent of 10 million barrels of Brent crude options - which would profit most if the global benchmark rises above $90 per barrel by mid-2019 but not above $100 - traded on Monday and Tuesday combined.
Richard Fullarton, founder of Matilda Capital Management Ltd., remarked, "It's hard not to buy deep out-of-the-money calls on the Saudi Arabia-Iran news."
But for all the worry over war, West Texas Intermediate on Tuesday fell $1.06 to settle at $55.70 per barrel, and Brent dropped 95 cents to end at $62.21 - a direct reaction to the International Energy Agency reducing its demand estimate for next year by 200,000 barrels per day (bpd) to 98.9 million bpd; IEA's forecast for demand growth in 2018 also fell by 100,000 bpd to 1.3 million per day.
The agency stated, "The market balance in 2018 does not look as tight as some would like, and there is not in fact a new normal" that would buoy prices above $60.
Michael Loewen, a commodities strategist at Scotiabank, said, "If you put two and two together, it shows that we are going to be a little bit oversupplied" in the first quarter; "traders in the market are focusing on that right now....we rallied too far, too quick."
Capping Tuesday's round of forecasts for sheer audacity is Tony Seba, co-founder of RethinkX, who told Bloomberg that the convergence of technology such as autonomous and electric vehicles will impact future demand for oil to the point where it "will peak around 2020 at 100 million barrels and drop to about 70 million bpd by about 2030," with prices sinking below $20 per barrel by 2021.
Seba is basing his forecast on extensive computer modeling.
The Organization of the Petroleum Exporting Countries (OPEC) presumably disagrees: in its latest monthly report it said the world would need 33.42 million bpd of OPEC crude next year, up 360,000 bpd from its previous forecast and marking the fourth consecutive monthly increase in the projection from its first estimate made in July.
While conceding that one day alternative energy would replace the world's dependence on crude, the cartel has repeatedly stated that a demand peak is not in the foreseeable future.
Another upcoming event could cause market turmoil, if not as severe as an outright war: OPEC is scheduled to discuss whether to extend its crude production cutbacks throughout 2018 on November 30, and last week Citigroup warned that contrary to widespread expectations, OPEC will likely delay a decision until next year.
