From 100 to 250 dollars per barrel: Exaggeration or not?

 

The conflict in the Middle East threatens to push crude oil prices over $100 a barrel. Some are even talking about $250 a barrel. Well, volatility is well known and if there is one thing traders know, it is that oil prices are difficult to predict. We will take a risk and estimate that it will not go above $120 a barrel before the economy itself and OPEC+ cool prices down. Of course, we could be wrong.

Investors are paying attention not only to the OPEC+ restrictions, but also to everything outside those acronyms. The higher the price, the more crude oil comes onto the market. As long as China's growth does not return to what it was 10 years ago. Crude oil prices are in practice like a member of the Fed and the ECB at the moment, setting the pace of inflation and depending on the production capacity of the Middle East, Russia and the United States. These in turn depend heavily on the conflicts in each region and the outlook for US producers ahead of this year's elections.

It is not entirely in the interest of OPEC+ to see crude oil prices rise above $100. Or for some, beyond $120, which would set off alarm bells.

They can be satisfied with a range of 90-120 dollars a barrel, but they would not let it go beyond that, so they could play to expand production a little more, especially Saudi Arabia, always with an eye on the United States, which for now has only a slightly more timid production increase, although reaching 13.2 million barrels per day (growing 300,000 b/d this year below last year's million).

However, as the global economy gains momentum from the recovery of the Chinese, Indian and American economies and demand is stimulated, there will be a problem for consumers and a lot of income for exporters. The economy under this pressure of high prices ends up affecting demand.

In any case, many traders are still waiting for OPEC+ to effectively keep oil prices in check. However, the risk in the Middle East and further escalation of the war could end up affecting the near-term supply expansion. That is the main obstacle. Especially as it relates to the flow of crude through major shock points. A combination of high economic growth or the expectation of it, as well as the war itself at various points in Eurasia (not forgetting the Ukrainian attacks on Russian infrastructure), can take prices to levels that not even OPEC+ can control, and that can have a subsequent impact on the pace of recovery due to the same inflationary effect in times of macroeconomic recovery.

For now, traders are assuming that the escalating confrontation between Israel and Iran will not have a significant impact on crude oil supplies, either through a tightening of oil-related sanctions against Iran or a disruption of tanker traffic through the Strait of Hormuz. What would be the Brent calendar spread captured by Reuter's June-December 2024 has softened to a pullback of $4.27 per barrel from a recent high of $5.61 on April 5. This could change.

From the WSJ

The geopolitical impact according to Eurasia Group

According to Eurasia Group, using US$90 per barrel as a reference, the estimated Brent premium of each would be:

War in Ukraine with further attacks on Russian oil assets: US$1 per barrel.

Increased attacks on Western tankers continuing to transit the Red Sea: $1 per barrel.

Attacks on Iraqi oil assets with Western ties: $1 to $2 per barrel.

Tighter enforcement of U.S. sanctions on Iranian oil exports, resulting in a loss of 500,000 bpd in shipments: $2-3 per barrel.

Sporadic attacks on oil tankers transiting the Strait of Hormuz, but without total disruption of shipping: $4-5 per barrel.

Full-scale war between Iran and Israel, with Israeli attacks on Iran's oil industry and Iranian attempts to disrupt shipments through the Strait of Hormuz: $50 per barrel or more.


From the WSJ

In summary, given the low probability of a full-scale war in the Middle East, but the high probability that one or more of the other events could occur during the second quarter, Eurasia Group expects Brent prices to range between $90 and $100 per barrel, provided that the underlying supply and demand fundamentals remain unchanged from the end of the first quarter.



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