Brent Hits 4-Year High as Fears of Market Tightening Go Into Overdrive

Misleading media headlines may be contributing to price gains based on sentiment. File Image / Pixabay

Although media headlines suggested that the long-dreaded crude market tightening has arrived due to the U.S. sanctions against Iran, it was more accurately the familiar fear of tightening and less of conclusive evidence that caused oil prices on Friday to rise 1.6 percent, with Brent climbing to a four year high.

Brent rose $1, or 1.2 percent, to $82.72 per barrel after reaching a four year high of $82.87; West Texas Intermediate settled up $1.13 to $73.25 per barrel, a 1.6 percent gain.

Phil Flynn, senior market analyst at Price Futures Group Inc., noted that "The market is coming to grips with the fact that the Iranian sanctions are not that far away; it's going to tighten the market."

The trouble with headlines such as CNBC's stating that Friday's price gains came "as U.S. sanctions on Iran tighten supply" is that the facts available to date are inconclusive: for example, the news agency reported that China's Sinopec Corp is halving loadings of crude oil from Iran this month; however, India is committed to buying oil from Tehran - and of course OPEC countries have been increasing production in recent months

Media is largely relying on statements from analytical bodies such as ANZ - which on Friday said major suppliers were "unlikely" to offset Iranian losses estimated at 1.5 million barrels per day - to advance the argument that a tightening either has already taken or will soon take place, thus compelling jittery traders to act on sentiment and boost prices.

Bloomberg on Friday declared that oil was on the "biggest tear" in a decade "as global supply cushion vanishes" - but nowhere in the story was there any mention either editorially or from analysts that the supply cushion had actually vanished; instead, there was mention of growing fears of tightening because Saudi Arabia, Russia, and the U.S. have signaled that their reserves are off limits.

For the record, U.S. Energy Secretary Rick Perry ruled out the release of oil from the Strategic Petroleum Reserve, saying it would have "a fairly minor and short-term impact."

The domino effect is of fear causing price gains that in turn generate dramatic headlines that in turn cause experts to make broad predictions that are widely perceived as negative, such as Trafigura Group Pte Ltd. and Mercuria Energy Group Ltd. forecasting that prices will soon exceed $100 per barrel.

John Dellanoce, co-founder of Titan Capital Management, and Richard Mallinson, co-founder of Energy Aspects, both told Bloomberg television that $100 oil is entirely possible, with the former speculating that both 2019 and 2020 will be good years for oil companies (it has been stated elsewhere that the high prices might encourage much needed infrastructure investment).

Stephen Brennock, oil analyst at PVM Oil Associates, on Friday stated in a note, "While we see such predictions as premature, one thing is clear: the ascent in oil prices shows few signs of capitulating."

The trouble with crude price gains based on sentiment rather than hard fact is of course that if outcomes don't match expectations, the crude price bubble will quickly burst; presumably, the reason for the dramatic rise of both Brent and WTI in the past few weeks may amuse the leaders of Russia and Saudi Arabia, both of which are reluctant to boost output because all economic signs indicate a slowing of demand next year, and from their perspective the market could easily go into oversupply rather than tighten unless carefully managed.