$80 Brent is just around the corner: At what price level does the danger lie?
Gone are the days when governments lamented about low oil prices, and consumers grinned ear to ear that pump prices were really low.
At $75 for Brent on Tuesday and nearly $70 for WTI crude, you can’t help but feel some invisible hands are cranking up the pressure to bring oil back to top form.
But is that top form good?
Who is betting oil is on a bearish track and what dangers lie ahead for this type of spike?
Money is on oil
Money managers are overwhelmingly betting that oil prices will continue to rise in the short term as geopolitical wild cards trump concerns that U.S. shale and other non-OPEC supply growth could offset part of OPEC’s efforts to further tighten the oil market,” according to Oilprice.com, a prominent industry site.
“Over the past two weeks, options traders have boosted their bets on Brent rising to $80 a barrel, and calls on Brent at $80 is the most crowded options trade on the ICE Futures Europe exchange, followed by call options on Brent at $70 a distant second.”
Bloomberg reports that options traders have about 137 million barrels worth of $80 Brent call options, a 37% increase in the last 14 days.
US president Donald Trump’s intent to pull away from Iran nuclear deal some few weeks later might be the final catalyst for oil prices to clear $80 level for Brent.
Certain market demand elements are also helping.
Reuters estimates that China’s oil imports will hit 9 million barrels per day in April, a monthly record high. China’s overall oil demand is expected to jump some 370,000 bpd in 2018.
Bloomberg said cash flow for the oil majors is set to be the highest in 12 years. The five biggest listed non-state controlled oil companies — Exxon, Shell, Chevron, Total SA and BP — will post their highest first-quarter net income since 2014, according to data compiled by Bloomberg. This will fuel bullish sentiment.
Courtesy of Oilprice.com
Oil action with Iran sanctions
According to BBC, oil prices hit $75 on Tuesday, the highest level in nearly three and a half years, as fears mounted over the prospect of new US sanctions on Iran.
“Such a move on the third-biggest oil producer in the Opec cartel threatens to further tighten global supplies,” said BBC
In November, OPEc and non-Opec countries agreed to extend those 1.8 million bpd cuts until the end of 2018.
The US president has said that unless European allies fix what he has called “terrible flaws” in the accord by 12 May, he will restore US economic sanctions on Iran.
Set up for new oil crash?
According to the Economic Times (ET) quoting Business Insider, Saudi Arabia may be sowing seeds of an oil crash.
“Saudi Arabia is rumored to want oil prices at $100 per barrel, but if prices rise that high, it could sow the seeds of the next downturn. Saudi officials want more revenues for their budget and a higher oil price to bolster the valuation of the Aramco IPO. But that shortterm thinking could spell trouble not just for them, but also for oil prices, and ultimately for longevity of oil demand,” ET reported.
In 2008, when oil nearly hit $150 per barrel, he world suffered a financial crisis throwing global economies in recession.
“First, oil prices are rising, in part, because demand is so strong, not just because OPEC is keeping barrels off the market. Oil at $100 would essentially amount to a doubling of the price from the past few years, which would quickly put an end to high demand growth rates,” ET said.
“Oil prices are high because the dollar is low,” Daniel Lacalle, chief economist at Tressis Gestion said on Thursday. Taking too much oil off to the market for too long could send prices “artificially” high he said. “That is a big concern…Because oil prices don’t generate crises; the abrupt and unexpected rise of oil prices creates crises,” Lacalle said, as quoted by ET.
Finally, at $100, oil would set off yet another round of frenzied drilling, likely resulting in an even stronger wave of new US shale supply.