Crude Gains, but Barclays Says Saudis Can Keep it Around $70/bbl

Tuesday July 10, 2018

Oil prices rose again on Tuesday, but the fear of a tightening market due to everything from the U.S. sanctions against Iran to production outages in other countries were kept in check with news that Washington might consider requests for exemptions from the Iranian sanctions.

And as if to further mitigate the fears that have been steadily building in the analytical community and stoked by mainstream media for weeks now, Barclays believes that increased output from Saudi Arabia will keep crude prices anchored near $70 for the near term.

West Texas Intermediate on Tuesday rose 26 cents to settle at $74.11, while Brent climbed 84 cents to $78.91 per barrel, and while prices earlier in the session looked to be approaching four year highs, they retreated when U.S. secretary Mike Pompeo said his country would consider requests from some countries to be exempted from sanctions on Iranian oil (previously it was thought the U.S. would expect all nations to refrain from buying Iranian crude by November).

Phil Flynn, analyst at Price Futures Group, noted that the announcement "basically took the wind out of the sails from the market," but he added, "it all depends on which countries they're talking about: is it big buyers of Iranian crude, is it India, is it temporary waivers?"

Another concern that has driven price gains over the past few days - disruption of Canadian oil sands output - has been mitigated with news from Suncor Energy that its 360,000 barrel per day (bpd) Syncrude facility would resume some production in July, earlier than expected.

Barclays on Tuesday said the U.S. may find it "politically unpalatable" to force China and India to stop Iranian imports by November: "We assume that the government will take this more pragmatic approach," wrote Michael Cohen, head of energy markets research for the bank.

He went on to speculate that "another scenario could emerge in which with increasing trade war tensions with the US, the Chinese government facilitates purchasing more Iranian crude."

Barclays said the bullish sentiment held by many experts "rests on shaky ground" because the market is underestimating the Saudis' ability - along with that of Russia, Kuwait, and the United Arab Emirates - to raise output to the levels required to meet global demand in the face of shortages from Iran, Venezuela, and other countries.

Plus, Cohen wrote that "The Saudis also do not want to disappoint U.S. policymakers nor lose its credibility; in our view, [U.S. president Donald Trump] has made clear in his tweets that he is not happy with higher oil prices, which is part of a long history of targeting OPEC."

Continuing its upbeat outlook, Barclays said the Saudis are likely to start exporting more oil to the United States - and a jump in U.S. stockpiles could dampen fears of undersupply and force prices lower.

Even while upping its oil price view to take into account lower supply from Libya and Iran, Barclays parted from majority analytical fears that crude is destined to hit the triple digits soon: the bank said it sees "Brent and WTI prices averaging $71 per barrel and $65 per barrel next year" due to Saudi output; also, "As prices rise to higher levels, the air is growing thin and oil demand is already faltering."

However, the crude market wouldn't be complete without its worriers, and on Tuesday David Demshur, president and CEO of Core Laboratories assumed that mantle by telling CNBC that "All of our operations here in the U.S. are doing great; internationally, year over year, activity level's only up 1 percent, [and] this gives me great concern about what crude oil prices are going to do over the next couple or three years."

He elaborated, "Right now, we are seeing a big uptick in the amount of crude oil being used; my fear....is that when we go to later this year into next year and 2020, we see $100-plus crude oil again."

Demshur's outlook was conservative compared to that of Bernstein Research, which earlier this week warned that the failure of energy companies to reinvest in oil and gas exploration and production will cause of "super spike" of over $150 per barrel in coming years.