Production cuts by OPEC and Russia over the past 16 months and the risk for Middle East conflict on the rise, crude oil prices have rallied more than 10 percent this year reaching their highest level since 2014. Higher oil prices comes as OPEC and Russia explore further cooperation and a May 12 deadline looms for U.S. President Donald Trump to consider renewing Iran sanctions.
Brent Crude has surged since the middle of February on a combination of two factors; 1. Tight supply as OPEC and Russia decide this coming Friday on whether to extend its supply cuts and 2. Geopolitical risk premium on whether President Trump will reinstate sanctions on Iran next month.
Current trade frictions will not significantly disrupt global trade and the fundamentals show oil prices trending upwards. Global inventories are close to their five-year average with total U.S. stockpiles of crude and fuel dropping below their five-year average for the first time since 2014.
But all attention is on what President Trump’s next move will be on Iran and what impact it will have on oil prices. With recent personnel changes at the White House and the State Department, along with the recent tighter sanctions imposed by the U.S. on some Russian entities, the probability of Trump imposing punitive measures is high.
If sanctions are imposed, the question will be how many thousands of barrels a day of exports from Iran, OPEC’s third-largest producer, will be removed from the market within the next six months and impact on global oil prices. Closest indication we have is what happened to the price of aluminum when Trump imposed sanctions on Russian aluminum producer United Co. Rusal.
The Rusal Effect
The Rusal sanctions has a dramatic effect on aluminum prices reaching a six-year high. Since the sanctions were imposed on April 5th, aluminum has jumped 21% to $2,460 per ton and may reach $3,000 per ton (see separate HXL Research Note).
Overall HXL sees crude oil prices leaning towards the upside based on the possibility of several reasons including lower OPEC supply, new supply risks and stronger demand. We will continue to see prices increasing and global inventories falling and it is likely that OPEC will maintain cuts into 2019 with Saudi Arabia giving little indication on whether it will increase supply. As mentioned, we see heightened supply risk as increasing political volatility in oil-producing nations of Venezuela, Angola and Iran also add to the risk premium.
Commodity-linked currencies including the Australian dollar, Canadian dollar and the Norwegian krone are likely to trade stronger if Brent continues to trade at these levels.
On this basis, we forecast Brent Crude to trade at US$67/bbl in six months and US$64/bbl in 12 months as the U.S will increase crude output.
Potential Oil Catalysts
May 12: Deadline for President Trump to extend waivers on sanctions on Iran
May 20: Venezuela Presidential Election
June 22: OPEC Meeting