A barrel of Brent crude oil now only costs about USD 65 – only six weeks ago the price was as much as USD 85. Back then, there was even speculation it might possibly shortly hit the USD 100 mark. In volatile market phases, six weeks can be a long time. However, the 24% crunch in the price of North Sea oil cannot be completely explained by the fundamentals. The past three months saw exaggerated movements in both directions.
In August, price conditions were decidedly bullish: The USA had just announced initial sanctions against Teheran. The US hinted that buyers of Iranian crude oil should reduce their imports to zero to avoid sharp secondary sanctions. In this context, the market started factoring in Iranian export losses of 1.5-2.0 million barrels a day (mbd). At the same time, domestic policy challenges in Libya meant that output there fell from 1.0 mbd to 0.6 mbd. Moreover, the US Dept. of Energy (DOE) scaled back its output expectations referencing pipeline problems in the premium shale gas zone of Permian. Finally, there were excessively high demand estimates that did not adequately reflect the way the multilateral trade conflicts slow down the economic cycle. When US President Donald Trump then called on OPEC+ to produce more crude oil to prevent the threat of a supply shortfall, there was no holding the price of a barrel of Brent.
This scenario also explains the latest price crash: The initial price of USD 85 was quite simply excessively high! The aforementioned fundamental factors are now starting to dampen prices. It has, for example, emerged that the worst-case projections for Iranian exports were scaled too high. In Libya, with its unsettled domestic politics, the major national players are now all pulling together, meaning that crude oil production has now actually reached 1.1 mbd. In the USA the latest DOE figures suggest that the production momentum is appreciably higher than assumed only in September. And given wobbly world stock markets, the forecasts for growth in demand have also weakened.
In this regard, the current price correction could well become excessive. For a whole series of factors speak in favour of prices rising again with a view to the next few weeks. OPEC+ will by the looks of it be throttling back output quite significantly. That should stabilise the price of a barrel of Brent at above USD 70. Moreover, the revised US production forecasts by the DOE will presumably turn out to be overly ambitious. In addition, it seems highly improbable that crude oil production in Libya will remain at the current high level. And in the run-up to the presidential elections in Nigeria (16 Feb.) there may be tangible output drops. Even if the Iranian “initial export losses” were less than the market expected, export volumes look set to slowly but gradually fall further in the course of the coming months. Finally, investors should keep in mind that a trade deal between Washington and Beijing could be a wild card that potentially drives prices upwards. All that could easily send the price of crude oil back in the direction of USD 75.