Oil prices to stay hot as upside factors pile on

Singapore

OIL prices could stay elevated, and some commodity experts do not rule out the possibility that crude benchmarks Brent and West Texas Intermediate (WTI) could hit US$80 and US$70 a barrel respectively this year - with the shocking move by the US to end Iranian crude sanction waivers worsening an already-tenuous oil supply crunch.

FXTM's analyst Lukman Otunuga said: "The fundamental themes in favour of higher oil prices are clearly stacking up their dominoes."

OCBC Bank economist Howie Lee expects oil prices to drift higher, with a target level of US$78 to US$80 a barrel for Brent.

Mr Otunuga said the WTI looks set to attempt US$70 if concerns over the tight supply in the global oil markets continue nudging more buyers to enter positions.

Several factors are at play, apart from US' decision to tighten its screws on Iran. These include production outages in Libya and possible sanctions on Venezuela, on top of the supply cuts led by the Organization of the Petroleum Exporting Countries (Opec).

Overnight on Monday, Brent oil jumped 3 per cent higher to US$74.20 a barrel; WTI climbed 2.5 per cent to US$65.70 after the US surprised the market, which had been expecting Washington to renew special waivers that have allowed Japan, China, India, Turkey and South Korea to import oil from Iran.

But Washington did the exact opposite and pledged to force Iranian oil exports to zero.

Crude prices continued to surge on Tuesday, hitting fresh highs for the year.

Jeffrey Halley, Oanda's senior market analyst, said: "What a day. Major importing economies in the region will be scrambling to find alternative supplies from May in what was an already-tight market.

"China and co. may find the assurance from the US - that Saudi Arabia and the UAE will "take up the slack" - somewhat empty."

OCBC's Mr Lee noted that Iran exported 1.3 million barrels per day in March, and that the onus was now on Saudi Arabia and Russia to produce close to their "historic highs" to make good the shortfall; it was also likely, he added, that Opec and other non-affiliated producers known as Opec+ will have to produce more to fill the void.

This means Opec is unlikely to stick with its supply curb once it expires in June; an end to these supply cuts in the second half could limit the upside for oil prices.

"It's again politics," remarked Massimo Bellino, a senior oil and gas analyst at SmartKarma, who recalled that last October, Brent spiked above US$80/barrel on expectations of a supply disruption from Iran - not unlike the episode unfolding now.

"(US President Donald) Trump will not allow the oil price to be very high for a long time. Saudi Arabia has already agreed to increase output; Russia wants to maintain its market share vs US shale by also increasing production.

"I anticipate Brent oil price would range, on average, between US$65 and US$70 this year - US shale production will keep oil from rising too high - but there is a 60 per cent chance that my forecasts will be inaccurate."

Vandana Hari, founder of Vanda Insights, a Singapore-based provider of oil markets macro-analysis, said ultimately, Opec and non-Opec's response to the latest move by the US and the pressure from Washington to ease supplies will be crucial in determining the trajectory of crude prices.

She added: "The market will be looking for a more formal reassurance from the producers' alliance. If and when that comes, we could see a halt in the price rally and possibly a downward correction too."

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