Forget geopolitical threats: CBA says tighter supply will drive oil above $US80 a barrel

Karim Jaafar / Getty Images
  • Oil prices could climb above $US80 a barrel “comfortably”, CBA says.
  • Analyst Vivek Dhar said Saudi Arabia still has a strong commercial incentive to keep oil prices higher.
  • US shale oil producers don’t have the infrastructure to fill in the short-term supply gap.

Oil prices are likely to be supported in the near-term by the continued withdrawal of global supply, Commonwealth Bank says.

Benchmark crude briefly reached $US78 a barrel overnight for the first time since 2014, before closing at $US77.47.

The recent gains have been driven in part by geopolitical catalysts, as prices pushed above $US75 a barrel ahead of President Trump’s announcement that the US will withdraw from the Iran nuclear deal.

Tensions between Iran and Israel are also on the rise, after reports that Israeli war jets struck Iranian missile facilities in Syria.

But according to CBA commodity strategist Vivek Dhar, the “geopolitical premium” is already largely priced in to oil markets. Rather, it’s the supply picture that will drive prices higher.

Dhar noted that Saudi Arabia said it would cooperate with other OPEC producers to alleviate further supply issues stemming from the withdrawal of the US-Iran nuclear accord.

However, it’s now almost 18 months since OPEC agreed to a coordinated round of supply cuts in order to rebalance global oil markets. The deal was extended to the end of 2018 last November, after commencing in January 2017.

And Dhar said reports continue to suggest the Saudis are eyeing off the $US80 a barrel level.

Such a price point would help boost the prospects of an initial public offering (IPO) for Aramco, the huge national oil company.

In that context, “we think Saudi Arabia has mixed incentives in addressing any shortfall risk”, Dhar said.

Furthermore, the largest spike in oil markets this week was driven by an unexpectedly large draw-down in US oil inventories.

It indicates that US production is yet to ramp up, despite the common refrain that higher prices will attract a swathe of US shale oil producers back into market.

“While current oil prices will no doubt boost incentives to boost US oil production, we think pipeline constraints will limit any near term response,” Dhar said.

“That means that oil prices could breach US$80 a barrel comfortably over the next 6 months, particularly if OPEC production continues to remain underwhelming.”

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