25th April 2019

By Reza Irani Kermani

The Oil Market

Lately, several factors have contributed to a slightly bullish outlook for global oil prices over the medium term.  The most immediate factor in recent days lies in the Trump administration’s declaration of its intent to withdraw the sanctions waivers granted to countries such as China, India and Turkey to purchase Iranian crude.  Such a move could remove over 1mm barrels of supply as soon as May 2nd.  Ostensibly, other OPEC members cantap their spare capacity to meet this demand, however tensions are once again on the rise around a potential closure of the Straits of Hormuz.

Remaining in the geopolitical sphere, sanctions on Venezuela and the prospects of renewed conflict escalation in Libya also add to the bullish picture.

The Oil Market by Reza Irani Kermani

However, while these factors can be interpreted as positive from the perspective of other OPEC members, they will be anxious not too let prices run too high and spark additional investment in US Shale oil producers, which remains a market that has yet to prove its long-term viability.  The US Shale oil industry, which underpins America’s oil production revolution, is at a pivotal phase, and the next 2 – 3 years will be critical proving its value proposition.

Critics argue that the industry’s ability to generate an acceptable return on capital is a mirage, citing well production levels that have not met the expectations set by producers in the last 3 to 5 years.The fear is that going forward, more drilling activity will need to take place to sustain production, resulting in still yet greater spending by producers than previously estimated, which is easier done for them against a higher oil price backdrop and easier access to capital under such circumstances.

The Oil Market by Reza Irani Kermani

Given the very real threat posed to OPEC by US shale producers, it is our expectation that OPEC will focus its efforts on starving the shale sector of capital, and thus need to keep a lid on prices for the time being and hope that the shale sector will begin to experience significant failures to maintain production and with it help bring an end to this challenging chapter in OPEC’s history.  Therefore, we are not bullish on the oil price from current prices.