Fundamentals not tweets will drive the oil price

Thought of the day

by Chief Investment Office 05 Jul 2018

With a Friday deadline looming for US trade action against China, President Donald Trump set his crosshairs on another target: OPEC. Trump demanded the group of energy producers act to lower prices, accusing OPEC of 'driving prices higher as the United States defends many of their members for very little $’s.' The presidential tweet only temporarily succeeded in pulling the oil price down on Thursday, with Brent recovering from a USD 77.58/bbl low to trade back above USD 78/bbl.

While demanding lower prices by tweet may win Trump media and market attention, we see several reasons crude prices are instead likely to rise further:

  • Significant production disruptions in Alberta (approx. –350kbpd) and Libya (approx. –600-700kbpd), alongside the free-fall in Venezuela and ongoing White House efforts to aggressively curb Iranian oil exports should keep the oil market in deficit over the coming months.
  • President Trump’s previous call for a 2mbpd increase from Saudi Arabia would necessitate significant time and investment, in our view, as a too-quick ramp-up of production over a sustained period could strain oil fields. OPEC and its allies so far have indicated an increase of around 1mbpd. By contrast, we now expect Iranian oil exports to plummet 1-1.5mbpd by year end (vs <0.5mbpd previously).
  • Even if Saudi Arabia and its GCC allies were to push ahead with more aggressive output increases, the market would be left with limited spare capacity to offset any unexpected outages ahead, adding to price risk premium.

We have lifted our six- and 12-month Brent forecasts to USD 85/bbl. The negative impact of higher oil prices on the world economy is less than in the past. Globally, 7% less oil is needed to produce the same amount of GDP compared with 2007. Net oil producers now represent 34% of global GDP, versus 16% in 2011 and the US is now a net beneficiary of higher oil prices due to rising shale production. But a potential spike in oil prices above USD 100/bbl cannot be ruled out over the next 12 months, which would have broader economic and market implications. UBS estimates the negative impact on global GDP of such a spike would be 0.2%, but with a larger impact on net oil importers, and the potential to weigh on business confidence and investment decisions.

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