Oil moved back into bull market territory this week, with Brent prices jumping to a more than two-year high at $58 per barrel. A confluence of events has given a jolt of optimism to oil prices, with market sentiment at its most positive arguably in years.
The proximate spark from earlier this week was the Kurdish referendum, which raised the specter of a sizable supply outage when Turkey threatened to cut off Kurdish oil exports through its territory, and Baghdad joined in by calling for an international boycott of Kurdish oil sales. So far, there are no signs of an actual supply disruption, but oil traded up at the start of the week on the heightened geopolitical risk.
But Brent prices have only moved up into the upper-$50s because the underlying fundamentals have improved markedly in the last few months. Oil demand is robust and continues to grow even as global supplies have stagnated. The OPEC deal seems to finally be bearing fruit in the form of a sharp decline in global crude oil inventories.
The oil market could finally be breaking out of a depressed pricing environment after three years of sluggishness, according to Trafigura Group, an oil trading company. “We are nearing the end of ‘lower for longer’ oil,” Ben Luckock, co-head of Group Market Risk at Trafigura said at the S&P Global Platts APPEC conference in Singapore on Tuesday. Luckock cites the fact that the oil market could lose some 9 million barrels per day (mb/d) by 2019 just from well depletion. That could leave the world short on supply, pushing up prices significantly.
Citigroup said that the supply crunch could come as soon as next year, arguing that so many OPEC members are already producing at their maximum, despite nominally restraining output. Libya, Nigeria, Venezuela, Iran and Iraq might not be able to add new supply next year, Citi says. And in fact, the risk of a slide in production is probably a more likely outcome for some members. “Fear in the market has been that OPEC production will rise dramatically,” Citi’s Ed Morse said in Singapore. But, “there could be a supply gap emerging, which could point to a tighter market.” Much of OPEC is failing to invest in its upstream capacity, Citi argues, leaving little room for higher output.