The oil market got a boost last week as geopolitical uncertainties stole the headlines.
Crude prices hit the highest levels in eight months after President Donald Trump tweeted a warning about a strike on Syria.
Later in the week, he followed through on the threat, with a coalition missile strike scaring investors and sending the price higher.
At the close of the week, Brent crude was trading above US$72 with WTI holding around US$67 a barrel and by Monday morning was down slightly at around US$71.80.
The market is reacting to the geopolitical uncertainty in the Middle East.
While any attacks on Syria won’t impact oil production, it’s the threat of instability in the wider Middle East and the possible effect on neighbouring oil producing countries.
Geopolitics against a tightening crude market
The global head of commodity strategy for RBC, Helima Croft cautions that the “the geopolitical backdrop is occurring against a tightening market.”
This has a different impact on the price this year as OPEC’s united efforts have succeeded in taking surplus oil off the market.
Iran supplies about 50,000 barrels of oil a day to Syria and the US threat of sanctions on Iran is also looming in the shadows.
A report from Saudi Arabia based Jadwa Research says “although oil prices were pressured somewhat at the start of April, due to trade tensions between China and US, they have since rebounded, as regional geopolitical tensions have become more predominant,” adding that we have not seen this mid-week price spike since October 2014.
The major investment banks are also reviewing their price targets in light of the geopolitical instability with Credit Suisse looking at an average of US$70 for Brent crude and JP Morgan predicting US$80 a barrel if hostilities in the Middle East escalate.
The president of Prestige Economics, Jason Schenker said the market was concerned about escalating Syrian and Russian risk that meant “prices rose above the critical 30-day and 100-day moving averages.”
He added that the risk of a trade war is still evident and will continue to present a downside risk, “despite a very strong imminent US driving season.”
Upgraded OPEC forecast
In its April monthly oil market report, OPEC revised its supply forecast upwards by another 80,000 barrels a day this year to reach 1.71 million barrels a day.
The main source of this new supply will be from the US and from the former Soviet Union.
The good news is that global growth demand remains robust with OPEC estimating growth of 30,000 barrels a day to 1.63 million barrels a day.
Positive OECD momentum
This is mainly due to “the positive momentum in the OECD in the first quarter of 2018 on the back of better-than-expected data.” Part of this stronger development was in the industrial area and in the mining sector in the OECD Asia Pacific.
Colder than expected weather also boosted energy demand early in the year. OPEC production was down by 201,000 barrels a day in March to 31.96 million barrels a day.
OPEC sees demand for its crude to be 32.6 million barrels a day for 2018.
Investment top of agenda for the sector
Investment in the oil and gas sector was top of the agenda at the 16th International Energy Forum in New Delhi, India this week. More than a thousand delegates attended the bi-annual event with ministers from more than 50 countries.
The OPEC Secretary General, Mohammad Barkindo addressed the conference and said, “investment is gradually inching back, but now as much as we would like.”
Focus on investment was on everyone’s mind in India at this ministerial gathering.
The UAE energy minister, Suhail al Mazrouei agreed that more investment was needed to meet projected higher energy demand.
In his role as President of the OPEC conference for 2018, Al Mazrouei is determined to cement relationships with Russia and non-OPEC members and he said that this was “essential.”
Barkindo said the group was busy working on a longer term arrangement with Russia, and said “there is growing confidence that the declaration of cooperation will be extended beyond 2018.” Al Mazrouei agreed and said he believed everyone was in favour and work was underway to secure a stronger agreement.
Saudi Arabia says “a lot of the glut has cleared”
The Saudi Arabia minister of energy was one of the keynote speakers at the ministerial in new Delhi where he outlined the current state of the oil market.
He said “a lot of the glut has been cleared” and added he was happy with the situation. He made it clear that he will not allow another oil glut to happen, and OPEC would certainly make sure prices do not rise to “unreasonable levels.”
Talking about investment in the sector, he reiterated the words of his colleagues and said as reserves decline, “the only way to offset this is for the financial markets to start financing and funding upstream projects.”
Geopolitics will be the focus this week
The geopolitical risk will be the main focus for the week ahead.
The US has announced further sanctions on Russia and the response was swift.
In a statement released by the Kremlin, it warned that further actions by the US would “inevitably lead to chaos in international relations.”
Sanctions from the US on Iran look likely, but if Europe also imposes sanctions, the danger of a further price hike is very real.