$100 per Barrel Oil – Not So Fast

Author: Gary Ashton

Estimated read time: 2 minutes

Publication date: 16th Sep 2019 11:11 GMT+1

It seems a weekend is a long time in the oil market. Late last week the International Energy Agency (IEA) published their monthly oil market report where they say, “In recent weeks, tensions in the Middle East Gulf have eased and oil industry operations appear to be normal.” Then news broke on Sunday that 50% of Saudi oil production is offline following a synchronised drone attack that the Saudi and US governments blame on Iran. Saudi Arabia is responsible for about 5% of global supply, so losing half of that supply is not an insignificant amount and will cause a short-term price spike.

Oil prices (CME: Brent Oil Futures) have been around $60 per barrel for some time, and the IEA predicted in its latest report that a rising glut of oil could push prices lower. In that September report, they see markets oversupplied by about 1.3 million barrels per day (md/d) in the first quarter of 2020 and over 1.0 mb/d oversupplied in 2Q20.

With Saudi losing about 5mb/d worth of production, this forecasted glut could turn into a significant deficit if oil production stays offline for an extended period or if tensions escalate with a retaliatory attack by Saudi on Iran. Some pundits are already looking at a return to $100 per barrel oil, but many factors would need to come together for that to happen even in the medium-term.

Rising Regional Tension

Regional tensions are escalating instead of easing, and there is now a real risk that oil prices could enter an upward trend from supply constraints. Higher oil prices are probably on the cards, but $100 per barrel oil is still a way off thanks to Saudi’s strategic oil reserves and reassuring messages that the Kingdom will restore oil supplies in a matter of weeks.

Before Sunday’s attack, the IEA said prices could trend lower from decreasing demand in the face of a slowing macroeconomic environment. Other analysts suggest that rising prices could lead to additional demand destruction which will mitigate the price effect of supply cuts. The one thing the oil market can count on in the weeks ahead is rising price volatility as these factors play out.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.