Crude Jumps as Saudis Deemed Powerless to Stop $100/bbl Oil

A lone analyst points out that whenever prices jump, extra supply tends to appear. File Image / Pixabay

The announcement of the trade agreement between the U.S., Mexico, and Canada, as well as the usual worries about market tightening due to loss of Iranian oil under American sanctions, caused crude on Monday to surge above $75, a four year high.

West Texas Intermediate settled up $2.05 to $75.30, its best closing prices since November 24, 2014, while Brent skyrocketed by $2.31 to $85.04.

John Kilduff, founding partner at Again Capital, said of the long awaited trade agreement, "It unleashes some more economic activity; it should enable Mexico to buy some crude oil off of us."

More troublesome to some, though, was the market's reaction to news that China's Sinopec, which is Iran's leading oil client, has cut crude imports from Iran in half ahead of Washington's November 4 deadline for buyers to stop dealing with the Islamic republic.

John Driscoll, chief strategist at JTD Energy Securities, told media that $100 oil is now possible, and he noted that such an outcome would threaten to cut demand in emerging economies: "This could trigger inflation; this could trigger substitution of other fuels for energy, [and] it ultimately will have a long-term effect on demand.

"We'll be back into that cycle of boom-bust."

Driscoll was hardly the only analyst to forecast crude n the triple digits: ANZ said on Monday that "the market is eyeing oil prices at $100 per barrel."

Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch, told Bloomberg television, said that with regards to the impact of the U.S. sanctions against Iran, Saudi Arabia can produce more crude to compensate for shortfalls, "but historically we've never seen it."

He added that if the Saudis were to increase output over two or three years, "it's possible [to compensate for Iran], because the U.S. shale supply can come in to fill the gap, but if you try to do it very quickly, the risk is you get a spike."

Reinforcing the notion that the kingdom is unable to compensate for Iran was Stephen Brennock, oil analyst at PVM Oil Associates, who on Monday acknowledged the entirely theoretical argument that Riyadh doesn't have the might to offset global supply disruptions by stating, "this essentially leaves the world's only swing producer powerless to prevent a supply shock and subsequent price spike in the final quarter of this year."

Paul Nolte, portfolio manager at Kingsview Asset Management, took a notably calmer tack in assessing the situation.

He told Bloomberg television that, "I think the supply issue is going to allow prices to carry higher into the fourth quarter.....we have a shot at $100, but I think that's probably at six months off now; the rate of ascent is not that steep."

He added with regards to widespread analytical talk of oil prices spiking this high, "The expectation is we get to $100, the disappointment might be that, as well all know with energy prices, when they start going up, supply starts showing up."

Noticeably absent in Monday's talk of price spikes due to Iran was the argument offered last week by Ben van Beurden, CEO of Royal Dutch Shell, who suggested that crude prices at this level may be necessary to encourage spending on oil and gas infrastructure after a period of under investment.