Brent Breaks $81/bbl as OPEC Says No to Output Hike

Trafigura sees oil prices hitting $100 next year. File Image / Pixabay

In a turn of events surprising for its bold-faced rejection of U.S. president Donald Trump's persistent demands, the Organization of the Petroleum Exporting Countries (OPEC) over the weekend refused to boost crude output - and as a result, crude prices on Monday skyrocketed to four-year highs.

Brent settled up $2.50 per barrel to $81.20, its best closing prices since November 11, 2014, while West Texas Intermediate rose $1.30 to $72.08.

Given the outcome of OPEC and non-OPEC oil ministers deciding in Algeria that they will only increase output in the event that customers want more cargoes, analysts are now dusting off their old forecasts that show prices going through the roof.

J.P. Morgan wrote in its latest market outlook that "a spike to $90 per barrel is likely" in the coming months due to the U.S. sanctions on Iran oil exports; it thinks Brent and WTI will average $85 and $76 per barrel, respectively, in the next six months.

Abhishek Deshpande, executive director at J.P. Morgan, told CNBC, "Iranian crude barrels are getting out of the market very rapidly, [and] I think the U.S. administration is going to go really hard on Iran....$85 is basically reflecting a geopolitical premium rather than demand-based support."

Ben Luckock, co-head of oil trading for Trafigura, was even more dramatic in his assessment, warning that prices could rise to $90 per barrel by Christmas and to $100 per barrel by the New Year.

Luckock added, "Is the era of 'lower for longer' over? I think it is; it's really now just a question of how high do we go, and what does that mean and when does it happen."

Harry Tchilinguirian, oil strategist for BNP Paribas, remarked, "It is now increasingly evident, that in the face of producers reluctant to raise output, the market will be confronted with supply gaps in the next 3-6 months that it will need to resolve through higher oil prices."

Not everyone was shocked and awed by Monday's market performance, however: Stephen Brennock, oil analyst at PVM Oil Associates,  stressed that the market could easily swing into surplus, and that this indeed would take place early next year: "The oil balance in the early part of 2019 makes very bad reading for oil bulls with a sizable supply surplus penciled in by the leading energy agencies.

"This will inevitably take the steam out of the current upswing in oil prices."

Equally cautious in his remarks was Mark Quartermain, vice president for global crude oil trading and supply for Shell, who said, "While it might not be a 'lower for longer' world right now, we want to make sure that our company is resilient should we see a return to those lower oil prices."

As for the reaction of participants at the Algeria meeting that caused Monday's hubbub, Alexander Novak, energy minister for Russia, seemed displeased by OPEC's refusal to increase output: he told Rossiya state TV, "All countries should aim to reach one goal: a balance of demand and supply; high oil prices are not beneficial to anyone."

Khalid al-Falih, energy minister for Saudi Arabia, said oil markets are "very well balanced" and "we expect a supply surplus in 2019, maybe we will have to return to a cut."

Last week, John Kilduff, founding partner at Again Capital, echoed the sentiments of some colleagues by pointing out that even if OPEC were inclined to boost output by 500,000 barrels per day, which sources said was likely, that amount would hardly do anything to lower prices closer to the $70 range that Trump was said to favour.