More Gains for Crude, But Breaking $80 This Year Will Take a "Geopolitical Event": Analyst

Tuesday September 4, 2018

Crude prices rose modestly again on Tuesday but, in a repeat of recent sessions, they were capped by tacit acknowledgment that the global market is perhaps more vulnerable to big output builds rather than the gradual tightening many pundits are convinced will happen soon.

West Texas Intermediate rose 7 cents to $69.87 per barrel, while Brent crude, which traded on Monday, hit a session high of $79.72 before paring gains.

The benchmarks jumped earlier in the day in anticipation of Tropical Storm Gordon and the evacuation of two Gulf of Mexico oil platforms, but they moved lower on the perception that the market was overbought - as well as on news that Cushing, Oklahoma, crude inventories rose nearly 754,000 barrels from August 24 to Friday, according to Genscape.

In contrast to past weeks, the main chatter on media channels focused largely on experts who think crude will have a tough time rising significantly for the remainder of 2018; one such individual was John Driscoll, chief strategist of JTD Energy Services, who told CNBC that it will take a significant geopolitical event, such as attempts by Iran to take control of the Strait of Hormuz, for prices to rise above $80 per barrel.

Despite Iran having already claimed to have seized control of the waterway and the news not affecting prices in the slightest, Driscoll said that the main focus for continued worry of market tightening and corresponding price hikes "is Iran: how much are they going to lose, how much are the sanctions going to bite, and how determined is the [Donald] Trump White House to curtail their exports."

Reiterating analysts' predictions that Iranian exports will sink to below 1 million barrels per day (bpd) in November, Driscoll mused that "Trump ironically is tightening the supply of oil while he's still kibitzing for lower oil prices - you tighten the supply and you'll get higher oil prices" - a curious comment to make considering he doubts oil will rise above $80 this year unless calamity occurs in the Middle East.

Meanwhile, as far as Algieria is concerned, the market is performing quite nicely: Mustapha Guitouni, energy minister for the country, said in advance of a producers meeting that with regards to the global perspective, "There is currently a balance between supply and demand."

As for a Joint Ministerial Monitoring Committee meeting due to take place in Algiers on September 23 and to include  Algeria, Saudi Arabia, Kuwait, Venezuela, plus Russia and Oman, Guitouni remarked, "I think the points of view will be very close and we will come out of this meeting with unified decisions."

That's not good enough, however, for Harry Tchilinguirian, oil strategist at BNP Paribas; looking ahead to 2019, he said, "Crude oil export losses from Iran due to U.S. sanctions, production decline in Venezuela and episodic outages in Libya are unlikely to be offset entirely by corresponding rises in OPEC+ production."

Left unmentioned in the latest round of hand-wringing over tightening prospects was China, which officials in Bahrain and Oman earlier this week argued may suffer a significant drop in oil demand due to its trade war with the U.S., a prospect that would be a severe blow to Oman, which sells almost 90 percent of its production to the normally crude-guzzling nation.