Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 21 March 2018 at 14:15 GMT

Oil rallies on raised disruption risks, stock draws — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Oil prices break north
  • US looks to boost Iran sanctions
  • Venezuelan production tumbles

By Ole Hansen

Crude oil has surged higher after emerging from several weeks of hibernation. The rise comes after crude broke through a key technical level and after receiving fundamental support through the renewed focus on supply disruptions. 

Washington, acting with the blessing of Saudi Arabia, looks increasingly likely to re-introduce sanctions against Iran, sometime that could hurt its ability to produce and export crude oil. 

The risk of the US walking away from the Iran nuclear deal this May rose following the meeting in Washington with Saudi crown prince Mohammed Bin Salman and after Trump last week sacked Secretary of State Rex Tillerson. His replacement, former CIA director Pompeo, is a known hawk on Iran, Venezuela, and North Korea and therefore holds views aligned with those of President Trump.

The market's bullish response to this news, however, is probably as much of a technical reaction as anything else. A reduction in Iranian exports could lead to the Opec-plus group abandoning its agreement to curb production by 1.8 million barrels/day. Russia would be happy to step away from the deal if given the opportunity while Saudi Arabia is likely to seize the opportunity to regain market share by cranking up its own production to meet a potential shortfall.

The biggest short-term risk to supply remains Venezuela where production has fallen to a multi-decade low. Additional US sanctions would further hurt its ability to produce as it is already struggling under crushing debt, crumbling infrastructure, labour unrest, and spiraling inflation.

Brent crude oil has reached a six-week high after breaking out its triangle formation and after US-Saudi talks raised the risk new sanctions against Iran:
Brent Crude oil, first month cont.

Source: Saxo Bank

The latest developments does not alter our view that Brent and WTI crude oil will continue to settle into a wide range, which for Brent crude oil is likely to be between $61/b and $71/b. During the first half of 2018, the price is likely to be supported by Opec+ production cuts, strong demand and supply risks from Venezuela and Iran. 

The second half could be more tricky with price pressure emerging from rising US production and export growth together with trade tensions which could impact global growth and ultimately slow demand for crude oil and products. Adding to this, we are likely to see increased focus on how the Opec+ group will handle stepping away from its deal to curb production. 

Brent Crude oil, first month cont.
Next up we have the weekly Petroleum Status Report from the EIA at 14:30 GMT. Yesterday the American Petroleum Institute surprised the market after reporting a counter-seasonal drop in crude oil stocks by 2.7 million barrels. 

Against this was a major rise in stocks held at the delivery hub for WTI crude oil at Cushing, Oklahoma. If the the 1.6 million-barrel rise is confirmed by the EIA, it will be the biggest weekly jump in a year. 

EIA survey and recent results

 — Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
The EIA replicated the findings of the API report in showing draws across the board while stocks at Cushing rose by less than expected. Crude oil production continued to set a fresh record while imports slumped by 0.5m b/d and refinery demand rose.
Ole Hansen Ole Hansen
EIA charts
matsuri matsuri
Mr Ole, do you really think that Russia and Saudi Arabia would abandon the deal if sanctions are reintroduced? What would happen to oil prices if the sanctions are back and then the deal is off?
Anatoly Vyacheslav Anatoly Vyacheslav
This comment has been redacted


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