Insufficient supply of crude in the pipeline due to Iranian sanctions a concern, said Bart Melek, director and head of global commodity strategy, TD Securities.
“Organisation of the Petroleum Exporting Countries (OPEC) does have significant capacity for the time being but much will depend on how much crude source out of Iran is taken out of the supply chain,” Melek said.
Oil prices were firm on Wednesday on expectations of tighter markets once US sanctions target Iran's petroleum industry from next month.
“We are likely to be range bound right now. I think there is a definite risk of crude oil moving higher. It is very possible that we will see levels that haven’t been around since before the decline in 2014. $90 per barrel is very much within the realm of possibility,” he said.
Edited Excerpts:
Nymex crude is straddling $85 per barrel. Can you tell us what is the range we can work with for the near term?
My sense at this stage is that we are likely to be range bound right now. However, I think there is a definite risk of crude oil moving higher. It is possible that we will see levels that haven’t been around since before the decline in 2014. $90 per barrel is very much within the realm of possibility, in fact, we are looking at technical levels just north of $90 per barrel at $90.76 per barrel as a possible level.
Key reason here is we are seeing a continued concern that there may not be sufficient supply in the pipeline once the Iranian sanctions start biding. In fact, fairly robust declines in imports into China that suggests that country will need to source its crude from somewhere else and this is, of course, all in the response to the American sanctions being fully imposed by November against Iran. So that is creating a bit of a concern that there may not be enough crude to supply a very robust demand around the world.
We are told that the Organisation of Petroleum Exporting Countries (OPEC) has a lot of spare capacity. They even increased output in the month of September. Cannot they compensate fully for the Iranian oil?
OPEC does have significant capacity for the time being, but much will depend on how much crude sourced out of Iran is taken out of the supply chain. They do have it, for now, it is a matter of the question of how willing is Saudi Arabia who in fact holds a vast majority of the spare capacity to put a new supply in.
Certainly, the last bit of news that we have seen from Saudi Arabia is that they are going to be very much disciplined about it and it does not necessarily mean that if prices go up a bit, they are willing to flood the market with crude.
As OPEC has always done, and I suspect Russia as well, will be looking at fundamental supply-demand factors to determine whether or not they release crude into the market. However, even if they do, over the longer run it is going to be difficult to have this market go significantly lower because now you have a risk.
If OPEC deploys its spare capacity to compensate for Iranian losses, then we are at risk of having shortages. Should something unexpected happen to the supply of crude around the world, be that disturbance in the Middle East, pipeline issues like we had in Canada, for example, a while back, all could very quickly cause a significant deficit.
So, the market, increasingly as OPEC consumes its spare capacity, will be assigning a risk premium.
You said that the technical resistance comes just above $90 per barrel, I think you said $90.76 per barrel is where the technical resistance is. What about the lower bound, how low can Brent go?
Our forecast indicates that we will most likely be above $72 per barrel for the time being for WTI. For Brent, we are certainly going to be higher in our estimates and we are looking at a range of $84-82 per barrel.
