Crude oil at highest level since 2014 – growing likelihood of a final upsurge in the crude oil price

Demand for crude oil is booming, and the price is spiralling up. Following an initial phase of stagnation, the OECD industrial inventories which have been the subject of investor focus are now heading steadily downwards in response to the „production limitation efforts“ started in early 2017 by 14 OPEC and ten NOPEC countries. With increasingly aggressive rhetoric, Saudi Arabia and Iran are once again quarrelling at several fronts over the issue of regional hegemony in the Middle East. The USA is considering whether to quit the nuclear agreement with Iran in the not too distant future if an improvement agenda for what President Trump calls „the worst deal ever“ cannot be put in place by May 12. And the aforementioned OPEC/NOPEC coalition is giving vociferous consideration to extending its market control cooperation, despite the fact that it will soon have reached its self-set inventory normalization target. Given this abundance of “bullish” reports, it is quite understandable that the Brent crude oil price should have risen almost unchecked over the last nine months from USD 45 to USD 75 and that, in the opinion of some market players, it is now preparing to also crack the USD 80, 90 and 100 marks in the near future.

There is much to argue for this view if it were not for a number of sound counterarguments which, in our opinion, suggest that the steep rise in the price of crude oil will come to an end in the coming weeks, with the price then finding its way back to the fundamentally warranted region of USD 60-70. However, on the precarious path leading towards this level we could still experience a final upsurge in the crude oil price around the time of the expected US decision date for whether to remain in or withdraw from the nuclear agreement with Iran.

For one thing, while demand is objectively booming, this is not happening to the exorbitant extent that the crude oil optimists would currently have us believe. For another, the extraction limitation measures of OPEC/NOPEC-24 have indeed brought OECD industrial inventories extremely close to the predefined target line of the five-year average. However, part of the truth about inventory levels is that (a) the normalisation target will not be reached as originally intended after six but only after 18 months, (b) the target attainment would not have come about without the escalating political, economic and oil extraction chaos in Venezuela and (c) the normalisation target had from the very start only been moderately ambitious and (due to the way it was defined) had become increasingly easier to reach over time. Thirdly, geopolitically-induced price increases do not generally last all that long provided there are no major production shortfalls. In this respect, the „Venezuelan case“ has been fully factored into the forward curve and, even in the – admittedly not entirely improbable – case of the US pulling out of the nuclear deal with Iran, the market has already anticipated a generous ex ante risk premium more towards the front part of the forward curve. In this context, it is interesting to note the way in which the market is currently focusing its attention exclusively on geopolitically-induced disruptions on the supply side – whether of factual or theoretical nature – while the (geo-)political disruptions on the demand side (keyword: „trade war“) are attracting virtually no attention at all, at least not at this point in time. Fourthly, the expansion of the OPEC/NOPEC cooperation under discussion is not heralding the approach of a supply shortage on the crude oil market; it is merely the inevitable reaction to dynamic production growth, particularly in the USA (and with some reservations in Brazil, Canada and parts of the „North Sea“) in times of very comfortable crude oil prices. Finally, the market is underestimating the productive growth forces being triggered in the US shale oil regions at WTI prices of > USD 65.

Conclusion: In the struggle for macroeconomic hegemony on the crude oil market, the (price-driving) geopolitical concerns currently have the upper hand over the (price-burdening) fears of an impending trade war. However, the crude oil prices which we consider to be too high will gradually unleash adjustment processes on the supply and demand side which will bring the crude oil price back to the region of USD 60-70 in the course of 2H 2018. Nevertheless, a final upsurge in the crude oil price around the time of the US decision on the nuclear agreement with Iran has recently become more probable.

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