Get Set for $7-$12/bbl Further Crude Gains Due to Trump: Analyst

Thursday April 12, 2018

With the argument posed earlier this week that geopolitical risk has replaced the machinations of the Organization of the Petroleum Exporting Countries (OPEC) as the main driver of crude prices, and with U.S. president Donald Trump currently considering military strikes against Syria and rescinding the nuclear deal with Iran, the question becomes, how much more can crude prices rise?

As far as Ehsan Khoman, head of MENA research at MUFG, is concerned, get set for further highs: he told Bloomberg television that his organization believes Trump will scrap the I*ran deal in May, "at risk is 250-350,000 barrels of Iranian crude, and we think in terms of pricing at least another $7 to $12 on Brent and West Texas Intermediate in the lead up to May 12th could potentially come to market."

But he suggested that lack of European support for Trump's decision could mitigate Iran's losses to a degree, and that otherwise Saudi Arabia and other OPEC countries will quickly make up for the losses - which in turn implies that the $7-$12 boost would be extremely short lived.

Richard Mallinson, geopolitical analyst at Energy Aspects, told CNBC that geopolitical risk must take into account the Iran issue as well as Syria, and  Ayham Kamel, head of Middle East and North Africa practice at Eurasia Group, pointed out that "It is very difficult not to see Trump move in a direction where he pushes the U.S. to withdraw from the nuclear agreement; that's very meaningful for oil markets and very meaningful for geopolitical stability in the Middle East."

Jumping somewhat late onto the geopolitical bandwagon was Mohammad Barkindo, secretary general for OPEC, who remarked that the cartel has been watching "with keen interest" developments in the region and elsewhere, "And we've also noticed a geopolitical premium re-emerging into the price formation," adding that "this is of concern."

Barkindo immediately followed this with a familiar refrain: "But the good news is the process of aiding the market, to restore balance which we had embarked upon, is continuing with renewed momentum, and the numbers are looking even more and more positive in terms of stocks shrinkage."

He also reiterated a growing consensus that OPEC will seek to make permanent relationships forged with non-OPEC members in order to maintain a degree of control over global supply and demand balance, and on this score, it's noteworthy that although analysts are now exclusively focused on geopolitics as a short term driver of crude prices, they have all but completely ignored the long term potential impact such a liaison may have on the market.

As if to reinforce the need of an extended relationship with non-members, OPEC in its latest monthly report revised its forecast for supply growth from its rivals for 2018 by nearly three times more than its revised projection of growth in global oil demand: It forecast a supply rise by a further 80,000 barrels per day (bpd) this year to 1.71 million bpd, driven largely by the U.S. and Russia; its forecast for global oil demand growth for this year increased by 30,000 bpd to 1.63 million bpd.

If nothing else, the current high prices are helping to put Canada's oil industry back in the black for 2018: Michael Burt, director of industrial economic trends for the Conference Board of Canada, said the industry will register pre-tax profits of about $1.4 billion this year after a string of losses since prices crashed in 2014.

One thing is certain about current crude pricing: OPEC members are profoundly at odds about whether it's desirable or not, and nobody can seem to maintain a consistent mindset: for example, after weeks of complaining that prices weren't high enough to kindle industry investment and that $80 crude was required to bolster the valuation of state owned Saudi Aramco, Khalid al-Falih, energy minister for the Saudis, upon being asked on Wednesday if he was pleased with the current state of the oil market, replied, "Yes, I am."