Oil Prices Subdued, But For How Long?

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By Irina Slav

Crude oil is about to end this week with the first weekly loss in a while under the combined weight of various bearish factors, but some analysts still believe we could witness Brent at US$100 a barrel before the year’s end. Others are more guarded in their predictions, but one thing is certain: the current price volatility in the oil markets is a rare occurrence.

All eyes are on Iran, but the brains behind these eyes don’t agree on the impact that U.S. sanctions will have on OPEC’s number-three producer. Everyone is hungry for tanker data to gain some insight into Iran’s export movements, and shipping data providers are rushing to provide it, with mixed results: impatience in reporting the data has already once led to a discrepancy of 700,000 bpd in Iranian oil exports for the first week of October. According to TankerTrackers, about 50 percent of Iranian tankers are currently concealing their route after they leave ports. That’s a lot of oil that’s missing from other, quicker reports.

As a result, some analysts expect the sanctions to take off half a million bpd from Iranian supply, and others are far more pessimistic, seeing a supply gap of up to 2 million bpd. As a consequence of this wide range of forecasts, many traders are probably feeling like the proverbial cat on a hot tin roof. A flurry of updates from investment banks and commodity traders is not helping, either.

Take the commodity giants, for instance. Earlier this week at the Oil & Money conference in London, the top executives of Vitol, Trafigura, Gunvor, and Glencore predicted the price of oil next year at between $65 and $100 a barrel due to a combination of many other factors apart from the U.S. sanctions on Iran—highlighting the uncertainty in the oil market about where prices are heading. And then there are the banks: Goldman Sachs’ Jeffrey Currie said earlier this week he was skeptical about oil’s potential to rise to US$100. “It’s definitely not our base case,” he told CNBC. “I’m not saying it cannot happen, but it would require a sustainable outage in Iranian exports going down to zero plus another disruption someplace like Venezuela.”

Barclays is also skeptical. In a recent report, the bank said that US$70 was a more realistic price level for the near term for Brent than US$100. According to its analysts, OPEC has enough spare capacity to offset any potential shortage, and although the cartel and Russia have approached production growth with caution, they are pumping more. Besides, the macroeconomic situation globally has changed for the worse, Barclays said, which has negative implications for oil demand.

It’s easy to see why the market is so jittery just as it is easy to see who stands to benefit from the current price level: OPEC and to a lesser extent Russia, which is not too fond of very high oil prices. Iran is also a winner: it sells its crude at a solid discount, but even with the discount it is making more from a barrel when benchmarks are higher. Some observers even argue that Iran has embraced the Western narrative that it is losing oil buyers faster than previously believed so it can drive prices even higher.

Yet these same buyers are getting increasingly worried about these prices. India has started complaining again and it was only to be expected: the country imports most of its oil and it’s been suffering a rupee depreciation that’s aggravated matters. China is openly buying Iranian oil. Yet the IMF and OPEC are both bearish about oil demand: emerging economies are slowing down and this will eventually hit oil demand. When this happens—and it looks like it will happen sooner rather than later—oil prices will have nowhere to go but down. The prospect of US$100 a barrel for Brent is beginning to look more uncertain as the end of the year draws near.

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