Brent Crude and WTI Crude prices hit a five-month high this week amid signs of tightening market and clashes in wildcard OPEC producer Libya.
Brent Crude topped $71 and WTI Crude rose above $64 a barrel in the middle of this week as supply reductions outweighed fears of slowing economic growth.
Following the crash in Q4 2018, oil prices have already increased by more than 30 percent so far this year.
But there is still room for oil to run and Brent could go as high as $80 a barrel this summer, due to geopolitical issues, OPEC and allies’ cuts, resilient demand, and not-so-crowded hedge fund longs suggesting that bulls have room to add more bullish positions in crude oil futures and options, according to a research note from RBC Capital Markets, cited by CNBC.
RBC strategists raised significantly their oil price forecasts for the average prices of Brent and WTI this year. Brent Crude is now seen averaging $75 a barrel in 2019, up from the previous call of $69.50, while WTI is expected to average $67 per barrel throughout the year, up from $61.30 in RBC’s previous estimate.
According to RBC’s experts, this summer, Brent could even hit $80.
This is a threshold which oil consuming countries such as India consider too high and which analysts say is the beginning of demand destruction.
“We see price risk asymmetrically skewed to the upside spurred by geopolitically infused rallies that could shoot prices toward or even beyond our high-end, bull-case scenario and test the $80/bbl mark for intermittent periods this summer,” CNBC quoted RBC’s research note written by strategists Michael Tran, Helima Croft, and Christopher Louney. Yet, not all analysts believe that Brent has some $10 a barrel upside from current levels. Goldman Sachs, for example, believes that the rally has almost ran its course and that Brent is unlikely to hit $80. Goldman has lifted its average Brent price call for Q2 to $72.50 from $65 a barrel, but expects shale production to rise and OPEC to come under pressure to reverse some of the cuts in the second half of the year.
But RBC warns that we could see $80 Brent this summer, on the back of geopolitically motivated rallies in oil.
Several geopolitical factors in the coming months could lead to higher oil prices than the current $71 a barrel Brent.
First, the U.S. is due to announce within weeks whether it would extend the waivers for some Iranian oil buyers to continue purchasing Tehran’s oil. Analysts largely believe that the ‘zero Iranian oil exports’ will not happen in early May, when current waivers expire, because the Administration would be more lenient, again, at least toward some buyers, so as not to drive oil (and gasoline) prices too high.
Then there is the issue with the tightening U.S. sanctions on Venezuela amid the Latin American country’s collapsing oil production, which was plagued by the sanctions and massive blackouts and plunged by 289,000 bpd to below 1 million bpd—to 732,000 bpd in March, according to OPEC’s secondary sources.
On top of these geopolitical concerns, one of OPEC’s wildest cards in recent years, Libya, is plunged in turmoil again after eastern strongman General Khalifa Haftar and his self-styled Libyan National Army (LNA) are advancing westward on Libya’s capital Tripoli and clash with troops of the UN-backed government in a renewed confrontation that could escalate and threaten to disrupt, once again, Libya’s oil production and exports.
Apart from geopolitical flare-ups that could suddenly tighten supply more than OPEC’s cuts have intended, the positioning of the money managers in oil futures suggests that oil still has room to rise, according to RBC.
“In short, there is room to run to the upside given that geopolitical hotspots are still a clear and present danger for the market, but many wounded bulls remain following the Q4′18 washout,” RBC’s analysts note.
The ratio of bullish to bearish bets peaked at 13:1 in the fall of 2018 and averaged 8.5:1 throughout last year, according to RBC.
In the week to April 2, the ratio of long to short positions in Brent and WTI increased to 6.50 from 5.60 in the previous week, according to exchange data compiled by Reuters market analyst John Kemp. To compare, last year in mid-April, that ratio was 15.00:1, while at the end of September, before the Q4 price collapse, the ratio stood at 13.88:1.
In addition to other factors boosting the oil price outlook, demand is also holding up, especially in China, according to both RBC and Goldman Sachs. RBC, however, warns that the outsized influence which China and India have on global oil demand growth could be a downside risk to oil prices should economic growth materially slow down.