While the oil market and analysts are trying to guesstimate how much Iranian oil the U.S. sanctions will stifle later this year, they all agree that the return of the sanctions is the market’s key bullish driver as well as the largest ‘known unknown’ for oil prices later this year and into 2019.
Some ultra-bullish hedge funds think that the U.S. sanctions will remove much more than 1 million bpd of Iranian oil from the market. Considering the low spare capacity for a quick ramp-up of production elsewhere, some hedge fund managers expect oil prices to jump to as high as $150 a barrel in 18 to 24 months.
“Our view is that by November 4, we will have lost between 1.3 and 1.4 million barrels [of output] a day. It is a very big number. That’s based on the view that the U.S. will allow a few temporary exception waivers,” Jean-Louis Le Mee, CEO at London-based Westbeck hedge fund told Reuters. “Ultimately, we could see losses from Iran exceed 2 million barrels a day,” Le Mee said.
According to Pierre Andurand, who manages the US$1.2-billion Andurand Commodities Fund, the world’s spare capacity is at its lowest ever, and this will be a real issue with global oil supply.
Replying to one of President Trump’s tweets blaming OPEC for the “too high” oil prices, Andurand said in mid-June that “OPEC has the lowest spare capacity ever right now. There is going to be a real issue. Prices will be above $150 in less than 2 years. Eventually higher prices will bring more supply. But right now too little supply coming over the next few years despite US supply growth.”
Generalist investors don’t have such bullish views, but “this is going to catch everybody by surprise,” Westbeck’s chief investment officer Will Smith told Reuters.
“If we are right about oil going from $75 to $150 over the next 12 to 18 months, out-of-the-money oil options, further down the curve ... look very exciting. The pay back there is just fantastic if we are right,” Smith said.
The loss of 2 million bpd of Iranian oil is the assumption in the hedge fund’s bet on $150 oil in a year or two. Iran’s oil exports peaked in April this year at 2.7 million bpd, and have been dropping every month since then.