Crude Climbs as Market Sees Supply Crunch and Return of $100/bbl Oil

Bullish sentiment seems to be growing more forcefully than ever. File Image / Pixabay

In the wake of the U.S. announcing that it is pulling out of the Iran nuclear deal and reimposing sanctions against the Islamic republic, fears that were never far from the surface regarding a tightening crude market heated up against on Thursday, causing West Texas Intermediate to settle up 22 cents at $71.36 per barrel and Brent to climb 26 cents to $77.47 per barrel.

Phil Flynn, senior market analyst at Price Futures Group Inc., summarized the trading environment by stating, "It's not going to take that much in this environment to create a disruption, and people are going to be very nervous to be short; there's not a lot of room for error."

As for what form the new sanctions might take, Fereidun Fesharaki, founder of FGE, fueled Thursdays' fears by writing in a note, "We believe the previous 1 million barrel per day [bpd] limit for exports [imposed during previous sanctions] will be reimposed."

Also, four sources familiar with the issue told Reuters that the Organization of the Petroleum Exporting Countries (OPEC) is in no hurry to decide whether to pump more oil to make up for an expected drop in exports from Iran.

Fueling fears yet further was Reuters itself, which pointed out that the Brent December 2019 futures contract is trading a full $6 lower than the December 2018 contract, the widest for any December/December spread since 2013, suggesting that investors are preparing for a tight supply-demand balance to get even tighter.

What all of this could result in, according to Bank of America Corp., which also took into account Venezuela's production woes, is crude rallying back to $100 per barrel next year.

There was also hand-wringing from foreign governments, specifically, Sheikh Mohammed bin Khalifa Al Khalifa, oil minister for Bahrain, who also warned of a supply crunch - albeit for a familiar reason all but ignored in the focus over the Iran issue: he said, "One of the risks we have to be careful of is investments: since the prices dropped in 2015, they have not really come back, and if you don't invest, you might face very soon a supply crunch."

Not to be left out of the fear-mongering over Iran, Al Khalifa added, "I think if the sanctions hit hard, definitely the supply challenge is going be more real —how much supply that is is yet to be known."

But as persuasive as all those fears many be, the crude market's beauty is that it is almost impossible to predict accurately, and for every voice warning of upcoming calamity, there is usually another expressing a calmer outlook, and on Thursday that voice came from Jeffrey Currie, global head of commodities at Goldman Sachs, who told Bloomberg television that, "the bullish environment for commodities and our bullish view is predicated on demand and where we are in the business cycle, and not on the geopolitical risk; in fact, there's very little evidence that there's a geopolitical premium in oil prices right now."

He added that the U.S. reimposing sanctions against Iran "reduces their capacity to produce, it doesn't do much to the forward balances" - the reason being that while the global market may lose Iranian exports, it will be compensated by production from Saudi Arabia and other nations.

Expressing a similar bullish sentiment were fund managers from Westwood, Hotchkiss & Wiley, and Hodges Capital who told media they are making broad bets on anything oil.

Gary Bradshaw, a portfolio manager at Hodges, said, "Oil companies are so much more efficient then they were even a year ago and much more disciplined; I think that you can finally say that this is the real deal."

Even though the conflict between Iran and the U.S. has dominated headlines for the past few weeks, some experts believe the impact of its outcome may have been overstated: such is the opinion of Barclays, which earlier this week pointed out that lack of international support for renewed sanctions will likely only remove 300,000-500,000 bpd of Iranian crude from the market.