Analysts Differ on Long Term Effect of Geopolitical Tension on Crude Prices, With Some Predicting $100/bbl

Friday April 13, 2018

With U.S. president Donald Trump on Friday deciding to move forward with air strikes against Syria in retaliation for Assad-led gas attacks against his own people, it's almost assured that geopolitical risk will be priced even further into the oil market next week - and even before the strikes were announced, pundits were lamenting that traders are ignoring fundamentals in their steerage of prices.

Matt Smith, director of commodity research at ClipperData, told CNBC, "We are still seeing geopolitics trumping the fundamentals here: what we've been seeing in recent days are these rising concerns related to Syria, and at the same time today we saw these de-escalated today by President Trump and his comments; but then we've also had the Huthis firing another missile into Saudi Arabia.

"So the concern is we're seeing prices getting supported here, because not only is the market that much more finely balanced, but at the same time there are a number of different pockets of geopolitical tension," and he added that Columbia, Venezuela, and Libya could cause yet more trading jitters in the near term.

Smith went on to say that there will be a further upside in crude prices "if we see geopolitical tension ratcheting up."

Anish Kapadia, founder and managing director of Akap Energy, was even more outspoken in his assessment of where crude could go: he told CNBC, "I don't think its unfeasible to see triple-digit oil prices at some point this year if things really kick off in the Middle East."

As if to lend credence to his remark, Kapadia added that  market participants had been "laughed out the room" when they projected crude futures to reach either $60 or $70 per barrel six months ago.

In a statement that was quickly proven outdated, Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note on Friday that "Trump's will-he-or-won't-he antics are here to stay and will, therefore, ensure that the geopolitical risk premium remains alive and well."

But perhaps more mindful that tension has historically been associated with Middle East/West relations, the International Energy Agency in its latest monthly report published Friday, remarked, "It remains to be seen if recently elevated prices are sustained and if so what are the implications for the market demand and supply dynamics."

Earlier this week, MUFG predicted that Trump's likelihood of scrapping the Iran nuclear deal next month will add another $7-$12 to Brent and West Texas Intermediate prices, which are already enjoying three year highs.