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Abu Dhabi, UAEFriday 22 June 2018

Brent's $70 plus rise on the back of Syria tensions is unsustainable, say analysts

Supply disruptions from Venezuela and collapse of the Iran deal could force Opec and allies into early exit from output cuts

The UAE's economy will expand at a higher rate due to an uptick in non-oil GDP growth  EPA/EUGENE GARCIA
The UAE's economy will expand at a higher rate due to an uptick in non-oil GDP growth  EPA/EUGENE GARCIA

Brent's rise to the three-year high of $72.5 per barrel last week fuelled by rising tensions in the Middle East region is unsustainable in the medium-term, analysts said.

Our view is that Brent "will sustain just over $70 per barrel pretty much through to the end of quarter three, over the summer months when we've got typically very high refining runs in the Atlantic Basin because of summer driving season," Alan Gelder, research director at energy consultancy Wood Mackenzie told The National.

Brent, the international benchmark for sweet light crude, reached a three-year high on Friday as the US, UK and France prepared to launch missile attacks against Syria. The three countries began striking Syrian targets in the early hours of Saturday in retaliation for the regime's use of chemical weapons in a rebel-held province that killed over 40 people and injured hundreds.

Oil prices began to rally above $70 per barrel earlier in the week as the White House convened to decide on the Syria offensive.

The price of Brent, which fell from $100 per barrel levels in early 2014 to half its valuation in the same year, has enjoyed a slow uptick since last year on the back of output curbs undertaken by Opec and producers outside the group, led by Russia.

Analysts remain convinced that Brent’s rise is short-lived with fundamentals of the oil market unable to match continued future upward trajectory.

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“While fundamentals are looking ok, we are not convinced they currently support a +$70 a barrel price and see room for some unwinding of long positions in Brent,” said Christopher Haines, head of oil and gas at BMI Research.

Much of the recent price appreciation was due to geopolitical risk, related to missile attacks against Saudi Arabia, the world's biggest oil exporter, and the escalation of military threats against Syria, which has prompted speculative oil buying that is “now heavily over extended”, he added.

While military action against Syria is unlikely to disrupt supply lines as the country is a minor producer and consumer of crude, oil markets must brace for significant disruptions from two Opec members. Venezuela is in the midst of a political upheaval that has curtailed itsproduction, while the US has levelled threats to scrap a nuclear deal with Iran that could potentially impact its oil production. Disruptions from Opec suppliers will at the same time be offset to an extent by a surge in US shale crude output.

“Oil prices will taper in the latter half of this year and into 2019 because we expect strong supply growth from the US, very strong supply growth from the Permian [Basin],” said Mr Gelder.

“We can expect to see a significant drop in supply in Venezuela, you also have some uncertainty around the geopolitics in the Middle East, particularly around the potential return of sanctions from the US to Iran relating to their nuclear programme and how that would play out."

A major impact of the disruptions to supply would a recalibration of the ongoing production curbs by Opec and its allies. The decision by the exporters group and producers led by Russia to pull 1.8 million barrels per day of crude out of the market over the last year and reduce high inventory buildup to support prices is up for review mid-year. While consensus has been built over consolidation of the global oil pact into a long-term alliance between Opec and non-Opec to keep on propping up prices, any supply collapse in Venezuela and Iran could force an early exit.

“If you look at Opec’s recent pronouncements, they’re seeing stronger supply growth out of non-Opec countries, so our view is that they need to maintain the current cut to ensure the market rebalances,” said Mr Gelder.