January Industry Affairs

Citi Says Trump and War Could Help Drive Oil to $80

By Sharon Cho

January 10, 2018, 2:07 AM CST Updated on January 10, 2018, 4:12 AM CST

This year may be anything but staid for the oil market as Citigroup Inc. predicts wildcards including war, Middle East tensions, Donald Trump and Kim Jong Un driving crude toward $80 a barrel.

After prices were boosted by OPEC’s output curbs in 2017, the U.S. President has shifted the focus to geopolitical risks, with his pursuit of sanctions on Iran and North Korea potentially having significant consequences, the bank said. That’s in addition to political disturbances in some OPEC members like Iraq and Libya that could see crude supplies decline, boosting oil to levels between $70-$80, it said in a Jan. 9 report.

“Many of these uncertainties have significant consequences for commodities,” Citigroup analysts including Ed Morse wrote in the report titled Wildcards for 2018: Trump looms large along with systemic risks. “It is not a surprise that our list of potential wildcard events in the year ahead retains a focus on the United States.”

The decision by the Organization of the Petroleum Exporting Countries and its allies including Russia to curb production and drain a global glut helped oil rally for a second year in 2017. From a market-fundamentals perspective, investors are now watching to see whether the U.S. continues to expand its output, a threat which has rocked the oil industry in the past few years.

However, the most wide-ranging systemic risk to commodities this year could be President Trump disturbing the political world order, Citigroup said. Brent crude, the benchmark for half of the world’s oil, traded at an average price of $54.75 a barrel last year. Front-month futures were at $69.05 while U.S. benchmark West Texas Intermediate crude traded at $63.38 as of 10:09 a.m. London time on Wednesday.

Re-imposing of U.S. sanctions on Iran, the third-biggest OPEC producer, is likely to dislocate at least 500,000 barrels of the Middle Eastern nation’s oil exports, resulting in a $5 price increase to oil, the bank said. Hard liners in the Islamic Republic may also seek to break a nuclear agreement with global powers including the U.S., while Congress may consider new sanctions against the Mideast producer, Citigroup said.

The rhetoric from and toward North Korea has also escalated in the past few months, carrying the “non-negligible risk” of turning into a military conflict, according to Citigroup. Stockpiling of strategic goods such as crude may accelerate with the risk of war.

The disturbance in Iran, as well as supply disruptions in Iraq, Libya, Nigeria and Venezuela could see global oil supply drop by more than 3 million barrels a day this year, Citigroup said. Over-tightening of environmental regulations in China, overshooting or underperforming shale production in the U.S., as well as a major escalation in trade frictions between Trump’s administration and China are other risks to oil, the bank said.

OPEC Will Try to Talk Prices Down If Oil Tops $70, Goldman Says

By Grant Smith and Francine Lacqua

January 10, 2018, 7:19 AM CST

OPEC would try to talk down an oil rally above $70 a barrel to cushion the impact on the global economy and rival supplies, according to Goldman Sachs Group Inc.

Oil has climbed to a three-year high above $69 in London amid OPEC production cuts, growing demand and political risks to supply. If prices keep rising, OPEC could see some unwelcome developments, such as greater investment by competitors including U.S. shale drillers, or central bank interventions to temper inflation, Goldman said.

“OPEC members do not want to see that,” Jeff Currie, the bank’s head of commodities research, said in a Bloomberg television interview from Frankfurt. “We’ll see more noise and rhetoric if prices trade above $70 a barrel in coming days to push this market back down.”

The Organization of Petroleum Exporting Countries formed an alliance with Russia in late 2016, cutting their output to end a glut that has weighed on prices and battered their economies. The coalition has agreed to press on with the curbs until the end of the year to eliminate the remains of the oil surplus.

Yet there are signs the cartel is growing uncomfortable with the consequences of higher prices. Iranian Oil Minister Bijan Namdar Zanganeh said Tuesday that OPEC didn’t want oil above $60 because it might provoke too much U.S. shale growth. Fellow members such as Iraq and Nigeria have made similar warnings.

America may challenge both Saudi Arabia and Russia as the world’s top crude producer, with its output headed for 11 million barrels a day in late 2019, the U.S. Energy Information Administration said Tuesday.

Further price gains would bring more money to the sector, closing the “window of opportunity” that OPEC has enjoyed while U.S. explorers have had limited access to new capital following disappointing results, Currie said.

Goldman sees opportunities for investors from the misalignment between short- and long-term prices. Spot prices are being supported by the strongest global economic conditions since the start of the commodities boom in 2004, while later-dated prices are being damped by the prospect of increasing U.S. crude production, Currie said.

Investors can gain by buying and holding earlier-dated contracts, profiting as they “roll” the position from one month to the next, Currie said.