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Is there a frenzied attempt to propel the crude oil market substantially higher than the already-high levels? Recent media reports that talk of the crude oil market soaring to $100 a barrel seem to suggest the possibility of a concerted drive in the direction by speculative forces.
US President Trump’s decision not to extend the waiver on Iranian crude to eight countries has become a convenient handle to unleash what may be an insidious attempt by some market participants — read, crude bulls — to take the market higher.
The futures market is currently in an overbought position as financial investors have actually expanded their net long positions in Brent and WTI to six-month highs. Yet, Friday last, oil prices lost as much as $3 to decline to $71.5 a barrel.
The market is seen stabilising after President Trump’s strong suggestion to key OPEC members, to permit higher export levels. the US shale oil sector is in a state of readiness to step up output in the months ahead given its spare production capacity.
There are other supply side factors to reckon with. While it is a pity that the Indian government has shown no spine and has capitulated to US pressure, there is no indication China has. Trade talks between the US and China are currently under way, and the former would surely be wary of pressing the Iran sanctions hard on China.
Unlike Saudi Arabia, Russia is keen to boost its output and exports to take advantage of the current price situation and not allow the US to dictate the market. So, there is the risk of the OPEC+ output cut agreement falling apart.
Admittedly, crude prices are about a third higher than at the start of the year; and the flow of speculative capital accounts for a substantial part of the increase. While the oil story currently revolves around supply issues and tight fundamentals, the demand side is sure to come into focus in the months ahead.
Growth in Europe, Japan and China is decelerating. The US, too, is poised for a slowdown as the positive effects of a stimulus (tax breaks, etc) have weakened. As a precursor, the US Federal Reserve has paused the rate-hike cycle.
Slowing economic growth is sure to depress crude oil demand with a concomitant impact on prices. However, given the current tight fundamentals, even a small change in demand or supply or both can exert a disproportionately larger impact on market prices. Despite this, any talk of crude reaching $100 a barrel appears outlandish now.
Be cautious
Stakeholders need to exercise caution, and not get carried away by extreme views on prices unrelated to fundamentals. Crude is likely to remain volatile until there is clarity on Iran sanctions, Beijing’s response to Washington DC and Russia’s role.
The role of the market regulator assumes greater importance in these volatile times. It may be necessary to closely monitor the derivatives market and restrict the flow of speculative capital.
The writer is a policy commentator and commodities market specialist. The views are personal
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