Crude oil prices have spiked today touching an almost four-year high with Brent Crude jumping above the threshold of $80 per barrel. At the time of writing this article, Brent crude oil and West Texas Intermediate (WTI) were trading around $80.60 per barrel and $72.08 per barrel respectively.
The spike in crude oil prices was driven by mixed signals from OPEC meeting that took place in Algeria on Sunday where OPEC led by Saudi Arabia and its non-OPEC allies led by Russia ruled out any plan to increase their oil output at the moment despite recent calls and criticisms by U.S. president Donald Trump to OPEC members to increase their oil output to lower prices.
OPEC and its allies do not see any urgent need to increase oil output at the moment. However, they clearly stated that they are ready to pump more oil should crude oil demand for their oil increases or crude oil supply falls due output disruption in Venezuela and/or U.S. sanctions on Iran. At the moment, there is no such demand.
Adding to the support, the terrorist attack on Iranian military parade in Ahwaz that took place on Sunday and resulted in the killing of 25 people provided some support to oil prices as it is seen as a high geopolitical risk in the Middle East.
OPEC/non-OPEC decision not to increase oil output, combined with accelerating losses of supply from Venezuela and Iran due to U.S. sanctions and the terrorist attack on Iranian military parade created a strong bullish signal that drove oil prices higher today.
How sustainable oil price above $80/bbl is?
If it was not for U.S. sanctions on Iran, my answer would definitely be “oil above $80/bbl is not sustainable at all and create more risks than its benefits”. However, going forward, as the oil market is eyeing U.S. sanctions on Iran and the impact it has on oil supply combined with the current decision by OPEC/non-OPEC to increase oil output, we could see oil above $80/bbl more often.
While OPEC and non-OPEC continue to assure the market that they are ready to pump more oil should U.S. sanctions on Iran cause a supply disruption, the market is not 100 percent sure that they can. On the other hand, the market is quite sure that U.S. sanctions will result in a fall of Iranian crude oil exports by more than a million. Weighting both sides, the negative side always wins when it comes to speculations. And that is what I think will continue to drive oil prices up until we see the actual crude oil production increases from Saudi Arabia and Russia once Iranian oil exports fall.
Having said that, I see oil price gaining between $5 – $10 on the barrel as a result of market anticipation of U.S. sanctions on Iran. I also expect that we could be seeing Brent crude above $80/bbl quite often in the next few weeks. The upward movement will continue either until U.S. sanctions on Iran take place or until we see oil supply increase coming from Saudi Arabia and Russia. BUT, I am 100 percent confident that oil price above $80/bbl is not sustainable as it creates more risks to the downturn than the benefits it provide. One thing we should always remember is that the reason we are in this downturn was high oil prices in the first place.
