Comment | Crude at $100/bbl looks a distinct possibility

CRUDE-OIL

Shishir AsthanaMoneycontrol Research

As if the political drama was not enough, rising crude price is hurting market sentiment further.

Oil has hit a three-and-a-half year high of $80 per barrel, thanks to a number of reasons, mostly geopolitical. Analysts are now reworking their price target with some estimating a $100 a barrel in the not so distant future.

There are many forces at play driving crude prices higher. For example, the steps taken by the US President Donald Trump. Sanctions on Iran is likely to take away 500,000 barrels a day from the country’s 2,400,000 barrels a day production. If Trump talks tough, this figure could rise further.

Add to that, the meltdown in Venezuela which has already taken away 500,000 barrels a day from the market in the last six months. This is unlikely to come back anytime soon as the oil fields operate with old machinery and little investment in improving production going forward.

According to International Energy Agency (IEA), “The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap.”

Other oil-producing countries like Nigeria, Libya, Angola, and Algeria are all having trouble pumping out oil. These countries have not been able to meet even their reduced production targets which were given by the Organization of the Petroleum Exporting Countries after the synchronised cuts by member nations. No wonder then that analysts are warning of even higher crude prices.

OPEC, led by Saudi Arabia and non-OPEC oil producing countries headed by Russia had cut their output by 1.8 million barrels a day to prop up oil prices. But now that oil prices are up, and these countries have smelled money, it is unlikely that anyone would be in a mood to increase production.

But what about shale oil from the US drillers that was expected to control a wild run in oil prices.

According to The US Energy Information Administration, US companies will be pumping more oil in the market. They are expected to add 1.2 million barrels a day in 2019 which follows a 1.3 million barrels a day increase in 2018. However, this increase in production is just enough to make up for the shortfall from Iran and other oil-producing countries. The incremental demand resulting from growing economies globally would still be unmet.

Having said that shale oil production in the US has constraints in the form of lack of piping infrastructure and skilled labour.

With the level of inventory standing at a five-year low, we are looking at a bull case scenario for oil.

Hardest hit by rising oil prices will be Asian countries, most of which depend on imports to meet their oil requirements. Asian countries account for 35 percent of oil consumption and only 10 percent of the production. Almost all Asian countries are growing steadily and a rise in oil prices is expected to impact these economies. The International Energy Agency feels higher oil prices will impact demand and in its latest forecast said the recent jump in oil prices will take its toll. The agency feels consumption may fall by 1.4 million barrels per day.

Oil prices have surged by 75 percent since June 2017 and 20 percent since January 2018, throwing budget calculation of all oil importing countries haywire. Adding to the problem is the strengthening dollar against all countries. This acts as a double whammy to importing countries.

So, will oil prices touch $100 a barrel mark? There is a strong buzz in the oil market that oil prices will continue to rise till Saudi Arabia’s state-controlled Aramco closes its IPO. The company preferred to delay its $2 trillion IPO rather than reduce its offer price when oil prices were lower. Saudi would like to come out with its IPO when the oil market is in frenzy. Till such time, the country would like to support oil production cuts.

In earlier oil price rallies, the US government used to lean over oil producers to increase production in order to bring down prices. The US was then the biggest importer of oil. But now the US is among the top oil producer and would like to gain as much market share as possible, so what if it has to put a ban on Iran’s export. The US will consider that to be too small a price to pay especially when it has been ravaging countries on a whim that they might be a threat to the US.

The US is already in a trade war with many countries it would need a robust economy to fight the war on various fronts, for which it needs to keep the shale oil and gas sector, its money-making machine well oiled. High oil prices are here to stay, smaller countries need to learn to live with it.