The 'black swan event' that could send oil to $US25 a barrel

A black swan at the Wuhan Zoo in Wuhan of Hubei Province, China. Photo: Getty (File)

Oil’s had a pretty good year.

The commodity’s seen a nice rally in light of a weaker US dollar, stronger economic data from China, decreasing non-OPEC production, and a continued rise in demand.

Both WTI crude and Brent crude were around $US48 per barrel on Monday, well above their lows below $US30 per barrel earlier this year.

But all of that may come crashing down if one “black swan event” transpires, argued a Bank of America Merrill Lynch global commodities research team.

From their recent note to clients (emphasis ours):

Global GDP in US dollar terms at market exchange rates is stagnant. Continued US dollar strength could force Saudi Arabia either to cut oil production modestly and push Brent back to $50 or de-peg the Saudi riyal, our black swan event, which could lead Brent to collapse to $25/bbl.

While this certainly sounds ominous for the oil market, it’s worth noting that analysts and financiers are split on whether the Saudis will actually de-peg their currency and undo the current fixed exchange rate with the US dollar.

Capital Economics’ Middle East economist Jason Tuvey previously argued that his team’s long-term view continues to be that the riyal’s peg against the dollar will remain intact.

On the flip side, Zach Schreiber, the CEO of PointState Capital who made $1 billion betting against oil two years ago, noted that he’s short the currency against the US dollar, arguing that the lower-for-longer oil-price environment and growing costs will ultimately lead the Kingdom to abandon its three-decade old currency peg.

But, as for the dollar, several analysts think that its recovery is just getting started, and that it has more room to advance this year.

As an end note, we should add that it’s a bit of a faux pas to call this forecast a “black swan” given that “black swan” risks are, by definition, nearly impossible to see coming.

However, when they materialise, it’s bad — and that’s the point BAML’s commodities research team seems to be making.

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