Crude Slips as Barclays Predicts High Chance of Price Collapse Later This Year

Monday April 16, 2018

Even though a far better outcome with the U.S. missile attacks against Syria caused U.S. crude to drop $1.17 per barrel on Monday, pundits point out there is plenty of other geopolitical tension coming down the turnpike to keep oil prices elevated for the first half of this year.

However, they add that an accumulation of fundamentals, which have largely been ignored by traders in 2018, will swing into play later this year and cause prices to plummet.

Amid widespread reports that U.S. president Donald Trump's missile attacks were far more surgically precise than anticipated, and in the absence of anything other than rhetoric from Syrian ally Russia,  West Texas Intermediate ended Monday's session down $1.17 at $66.22 per barrel; Brent dropped $1.13 to $71.45 per barrel.

Assessing the bigger picture, Phil Streible, senior market strategist at RJO Futures, said the market "has got everything to possibly boost it: weak dollar, Syria, potential sanctions, White House uncertainty, China trade" - indeed, the next issue widely expected to send prices upwards is the May deadline for Trump withdrawing his country from the nuclear deal between Iran and six world powers.

To what extent prices will climb is anyone's guess, but Fereidun Fesharaki, chairman of Facts Global Energy, suggested that even in the absence of supply-related geopolitical tension, "$80 oil is coming ... within the next couple of months," and he added, "the Saudis are aiming for it; Iran and Venezuela sanctions add to the pressure."

Slightly more conservative was John Driscoll, director at JTD Energy Services, who said that the Trump administration's willingness to actively engage Russia, Iran, and the Syrian regime means there's a "good chance we will breach $75 Brent shortly and hit new multi-year highs."

But ever sensitive to how sentiment has swayed the market in recent months, Amrita Sen, chief oil analyst at Energy Aspects, remarked, "Crude has outperformed most expectations for this time of year and may have rallied too far too fast ... there is no doubt that geopolitics has factored prominently in the rally of the last week."

The consensus of those focused on fundamentals liken that price momentum to a train headed for derailment: Michael Cohen, head of energy commodities research at Barclays, told CNBC that "we think prices are skewed to the upside this quarter, but we're looking for a correction as we go into the second half of the year and into next year."

Cohen cited four factors driving his bearish forecast, the first being that the supply impact of renewed sanctions on Iran is overstated and the market has already priced in falling output from Venezuela.

The second is that one off factors such as severe weather that crippled some U.S. oil supply - and thus supported prices - are over; third is the fact that American shale production is consistently rising to record highs.

And that leads to Cohen's fourth and most important point: that the crude market will go back into surplus later this year and remain oversupplied through 2019.

Still, those fixated on Middle East tensions such as Anish Kapadia, founder and managing director of Akap Energy, point out that it wasn't too long ago when experts scoffed at the notion of $60-$70 oil - and he thinks fear in the short term will cause "triple digit oil prices at some point this year."