Forces are aligning that could see oil rise back above $US80 a barrel
There are increasing signs that a break above $US80 for a barrel of oil is now on the cards, after benchmark Brent crude prices closed on Friday night at $US72.58 a barrel.
That capped a weekly gain of 7.9 per cent, while West Texas Intermediate (WTI) oil closed at $US67.39, which left both measures at their highest level since 2014.
That’s great news for ASX-listed oil producers — and it’s hoped the higher prices may spur more exploration activity here in Australia.
Spending on oil and gas exploration in Australia dropped by more than 25 per cent in the December quarter to $245 million, according to the government’s latest Resources and Energy Quarterly report.
However the boss of perth-based oil producer Triangle Energy (ASX:TEG), Rob Towner, recently told Stockhead he was “feeling better now than I have done for a couple of years.
“All the oil producers have been actively reducing their cost structures, and many of us are producing at under $30 a barrel,” Mr Towner said. “And in the last six months oil has gone from $US40 to almost $US70.”
Heightened geo-political tensions have been the main catalyst for the recent price action, and the US-led attack on chemical weapons facilities in Syria over the weekend did nothing to dispel the threat of further conflict in the region.
Markets are also assessing the prospect of a breakdown in the nuclear disarmament deal between the US and Iran, with US President Donald Trump pushing for key changes by May 12 which could see the US withdraw from the agreement.
That being said, analysts from Barclays Bank aren’t putting too much weight on the outcome of potential changes to the US-Iran nuclear deal.
“Yes, it should kill the prospects for medium-term oil investment, and yes it could destabilise the region further, but we struggle to accept a narrative that the market had been expecting big gains in Iranian output over the next several years anyway,” Barclays said.
The analysts forecast that geo-politial tensions will keep oil elevated above $US70 a barrel through April and May, before prices decline towards $US60 a barrel by the end of the year.
Prior to last week’s rally, oil prices were already trending higher, with recent statements from OPEC indicating it’s in no rush to to put a halt to its current round of supply cuts.
AxiTrader’s Greg McKenna noted this morning the latest price-action marks a key break from oil’s recent trading range.
So in addition to market fundamentals and geo-political developments, technical factors also point to another move higher for oil prices.
“In the case of Brent the target is now $US81.00-$US81.50 a barrel while for WTI it’s around $US74-$US75,” McKenna said.
Here’s McKenna’s assessment of the technical price action in West Texas Intermediate:
Among the reasons to be more cautious about the bullish price-action, there’s always the prospect that US shale oil producers will respond to higher prices by ramping up production.
Back in January, analysts from CBA cited rising US production as one of the main factors that will lead to a sharp reversal in oil prices later this year.
And a report in the Financial Times addressed the latest escalation in Syria may be reminsicint of previous military interventions in the middle-east which threatened global oil supplies.
History shows that traders often bid up oil prices as the threat of military strikes increases.
But once military begins, the outcome often becomes more clear — particularly if it involves surgical airstrikes rather than a broader offensive — and that certainty can give rise to a corresponding selloff.
However, research from RBC Capital Markets indicates market participants should be aware broader regional conflict playing out in the middle-east that’s giving rise to a “fear premium” for oil prices.
“With Syria tensions escalating, the critical concern is that the conflict could ignite a regional conflagration,” RBC said.
“Meanwhile, the proxy war raging in Yemen presents a clear risk to regional energy supplies given attempted attacks on Saudi targets.”
McKenna concluded that traders will have to consider how the conflicts playing out on various fronts will affect the outlook for oil in the near-term.
“Overall, even if this ultimately proves an unsustainable spike, a run higher still looks likely when we add the technical picture to the fundamental backdrop,” McKenna said.