$100 oil is suddenly all the rage, but some analysts remain unconvinced.
The supply outages in Iran combined with the decision by OPEC+ not to take further action to offset the declines pushed Brent to multi-year highs this week, and led to a flurry of calls for $100 oil before the year is out. Bank of America Merrill Lynch even wondered if a 2008-style price spike was in the offing.
Not everyone is getting so carried away. Barring another unexpected supply outage, the market should ride out the year just fine, according to Goldman Sachs.
“[W]e believe another supply catalyst beyond Iran would likely be needed for prices to meaningfully break to the upside,” Goldman analysts wrote in a note. “In particular, we continue to expect that production from other OPEC producers and Russia will offset losses out of Iran, as has been the case so far.”
The investment bank sees Brent “stabilizing back in their $70-80/bbl range into year-end.”
The analysis is notable since Goldman has often been a little more at the bullish end of pricing forecasts. The bank’s analysts went to lengths to emphasize that it is not pessimistic on oil prices, and it maintains its “overweight” outlook on oil and other commodities.
Goldman admitted that Iran’s supply losses have mounted much faster than expected, having dropped about 0.65 million barrels per day (mb/d) since April. More losses are expected with sanctions set to take effect in early November. Iran’s oil exports to Europe, Japan and South Korea have already plunged to “negligible” levels. China has cut some purchases from Iran.
Crucially, the latest news from India suggests that Indian refiners are going to be much more cautious than expected. On Tuesday, Bloomberg reported that India, at least as of now, is set to cut oil imports from Iran close to zero in November, going far beyond what nearly all oil market analysts – and even top Indian officials – thought was possible. Bloomberg noted that Indian Oil Corp. and Bharat Petroleum Corp., the two largest refiners in India, have not booked any cargoes from Iran for November. A few other Indian refiners have also declined to secure November deliveries. That could change, but these companies would need to finalize purchases by early October for November delivery.
“Iranian exports may drop below 1 million barrels a day in November, with Indian refiners potentially loading nothing and China cutting back as well,” Amrita Sen of Energy Aspects Ltd. said in a note.
Still, Goldman Sachs says this isn’t a reason to panic. “The decline occurred faster than we had expected, although some Iranian production is likely being exported through Iraq, with Basra loadings up 0.3 mb/d over the same period,” Goldman analysts argued. “While we adjust our Iran export path to re?ect this faster decline, this has no impact on our oil balance as we continue to expect that the rest of OPEC will offset such losses.”
Right on cue, Libya’s oil production just rose to a five-year high at 1.28 mb/d.
Increasing output from Iraq, Saudi Arabia and Russia have led aggregate OPEC+ production to come in higher than expected. Plus, the pledge from OPEC+ to return to 100 percent compliance suggests another 0.5 mb/d could be on the way. Saudi Arabia has already hinted that it would ramp up production in September and October as Iranian supply goes offline. To top it off, production from the Neutral Zone between Saudi Arabia and Kuwait could come back online, adding another 0.3 mb/d by the first quarter of 2019, Goldman says.
Finally, Iran is losing output faster than expected, but the trajectory of the losses is unclear. Goldman notes that the new sanctions-busting financing vehicle setup by the EU, with the support of China and Russia, could help Iran mitigate some of the losses.
The key question could be the timing and the magnitude of the potential increases from OPEC+. In the past, OPEC has had a tendency of reacting to production losses, rather than “front-running” those outages, as Goldman notes. So, its latest decision to do nothing should not come as a surprise.
The downside of waiting too long is that OPEC may respond late to a run up in prices, allowing a price spike to occur. In the past, the cartel has produced more supply just as the oil market takes a turn for the worse, and the extra barrels exacerbate the bust.
The Wall Street Journal reports that this time around, OPEC+ may be aware of this trap, and recognizing that demand could soften later this year and especially in early 2019, the group wants to avoid adding too much supply. OPEC’s view is that the market is not in danger of overtightening because in the first quarter of 2019, demand could dip by some 600,000 relative to August levels.
In other words, OPEC doesn’t believe more supply is needed. Saudi Arabia could unilaterally add production, calibrating increases in response to what it thinks the market needs. But for now, OPEC+ doesn’t think a major increase in production is necessary and doesn’t appear concerned about a price spike.
By Nick Cunningham of Oilprice.com