Why economics should trump politics in the oil market

Thought of the day

by Chief Investment Office 15 Mar 2018

It’s been a busy week for the oil market. On Thursday, the International Energy Agency (IEA) raised its 2018 global oil demand forecast and flagged the risk that, if Venezuela’s output slump continues, the market could tip into a shortage. The appointment of foreign policy hawk Mike Pompeo as US Secretary of State has also increased the chances that the US will leave the Iran nuclear deal and end the sanctions waiver that allows Iranian oil exports.

Despite these potentially bullish developments, we see reasons why oil prices are unlikely to move higher:

  • In our view, non-OPEC supply increases, driven by US shale production, will outstrip rising demand, leaving the global market balanced. This week OPEC for the first time forecast that rivals’ supply growth will exceed demand growth this year.
  • To curb Iranian exports, potential US sanctions would need support from other countries, since the US doesn’t import Iranian oil. Even if Iran’s exports are restricted, other OPEC members currently curbing output may take up the slack. And some Asian countries such as China might take more Iranian oil if the offered price is attractive.
  • The bulk of the Venezuelan output slump may already have occurred. Output has fallen from 2.3m barrels per day to 1.55mbpd over the last two years. The IEA sees a further potential drop to 1.38m by year end.

Overall, while we are monitoring the political risks that could curb supply, we maintain a negative view of oil prices due to further near-term buildups in inventories. We forecast Brent crude to fall to USD 61/bbl in three months and USD 57/bbl in six and 12 months (from USD 65/bbl now).

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