Oil markets will see Bulls ruling longer, while Bears hopes shatter

Cyril Widdershoven
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Global oil markets are still trying to reassess their options, as fundamentals and geopolitical issues have become a poisonous mix. Even with possible developments related to the Iran JCPOA negotiations, as insiders indicate that a deal is possible, increased worries about possible supply constraints exist.

This is partly based on OPEC+ members not able to produce up to their available quota levels, while US shale and Canadian oil production are not yet showing substantial increases.

Perceived positive news from inside the JCPOA talks have pushed oil prices down slightly, but overall bullish sentiments are still ruling pushing prices to the critical $100 per barrel level. Imminent relaxation of COVID-19 measures in most OECD markets also are putting a fundament under higher oil price expectations.

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Bullish sentiments are ruling the market right now, as already shown by new assessments by Goldman Sachs, JPMorgan and others, all indicating a possible $100-125 per barrel as a real option.

OPEC+ leaders Saudi Arabia, the United Arab Emirates and Russia, are continuing with existing production strategies, only willing to open up their taps with marginal additions. No signs are there that additional volumes will hit the market soon, even if Biden and IEA are asking for it.

Some flexibility still exists in the market, but there are potential production constraints from OPEC members, including Saudi Arabia, as shown in the latest OPEC+ production volumes.

If Bears still hope for a change in sentiment, based on removal of QE or inflationary pressure, geopolitics is tilting the market clearly to be bullish. The ongoing Ukraine-Russia crisis, threatening not only a European large-scale military confrontation, but also a possible blockade of Russian oil and gas exports, is a bullish primus inter-pares price pusher.

Removal of Russian gas supplies to Europe, starting with a blockade of Ukraine pipeline volumes, would put Europe’s energy crunch back in place, and also increase the thirst for crude oil. As indicated by European and American politicians, in the event of a Russian invasion of Ukraine, oil exports and companies also will be targeted, removing Europe’s main oil supplies by one stroke. A potential removal of 4.3 million bpd of Russian oil from European markets would be a watershed situation. A full-scale crisis between Washington and Moscow would take another 200K+ bpd of crude.

The ongoing Ukraine-Russia crisis, threatening not only a European large-scale military confrontation, but also a possible blockade of Russian oil and gas exports, is a bullish primus inter-pares price pusher, writes Cyril Widdershoven. (File photo: AFP)
The ongoing Ukraine-Russia crisis, threatening not only a European large-scale military confrontation, but also a possible blockade of Russian oil and gas exports, is a bullish primus inter-pares price pusher, writes Cyril Widdershoven. (File photo: AFP)

At present not one single producer has enough spare production capacity to fill these gaps. Even total OPEC spare production capacity, realistically, is not available to counter this loss of supply. At the same time, Russian crude is in demand, as their specs are needed to support global refining capacity. US shale or Venezuelan-Iranian options are not an alternative at present. A combination of Russian oil-gas volumes removal from the market would not only bring Europe’s and part of the US economy to a standstill, but also result in a price spike of unknown order. Spikes of $10-15 per barrel could be optimistic, with barrels expected to hit $125 shortly.

Hoping for possible additional volumes coming from Libya, Iraq or by lifting Iran’s JCPOA sanctions is unrealistic, because these countries cannot supply required volumes or have the necessary crude qualities readily available. Analysts have been looking at the effects of the Iranian Islamic Revolution and Iraq-Iran War, but a straightforward loss of Russian oil and gas volumes, combined with current historically 5-year lows in global storage volumes, are a recipe for disaster.

The only available option, which is being already discussed in Washington and most European capitals, is to open the respective Strategic Petroleum Reserves (SPRs). Most Western European countries holds SPR volumes of up to 160 days, but the main question is which crude quality is available for release.

The US, Japan and others have been opening part of their SPRs already, but a real price mitigating effect has not been seen. The only reaction in the markets was that this is a wrong political move, diminishing the potential impact of future SPRs.

In the coming days, all eyes will be on the Vienna talks, with an expected outcome imminent. A positive outcome, at least in the eyes of European partners and Iran, could lift (part) of the current sanctions, which have been constraining Iranian oil exports. The main question is how much more Iran is able to export if sanctions are lifted? Optimism levels aren’t high.

The Ukraine-Russia conflict is keeping the markets jittery about the growing view that that war is imminent. Strategic maneuvering of Russian forces and border skirmishes hasn’t helped.

Potential geopolitical is pushing a premium of already $6-10 per barrel. A combination of a breakdown of JCPOA talks and the Ukraine situation will push oil prices for sure over the $100 per barrel level. Removing Russian oil and gas supplies from the main OECD markets will push us into the unknown given the tightness of the market and growing oil demand.

Considering the global perspective, there is no White Swan option available in the market. US shale is not able to increase production within a short time by 1-1.5 million bpd in the case of Russian actions. Statements by Daniel Yergin and others that US shale could increase production by 900,000 bpd in 2022 are wishful thinking: upstream investments remain low in shale and conventional plays in the USA.

Iran is not able to slow down any price spikes either. Optimism about additional volumes is only based on available offshore oil storage and not increased production options. Keep in mind that the renewed call by the International Energy Agency (IEA) on OPEC+ to increase production is a call for help; not based on its own energy-transition strategy, but based on hard facts currently hitting the market.

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Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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