Oil: temporary surge or the start of something bigger? – Natixis

Analysts at Natixis note that oil has had a very strong start to 2018, with both Brent and WTI trading above $60/bbl and has continued the bullish rally in crude since early October 2017, with Brent currently up 22% since 9th October.

Key Quotes

“But are higher prices here to stay?”

“Geopolitical tension has once again lent support to the market, with protests in Iran the main driver behind oil’s gain so far this year. The protests started on 28th December, and have largely burnt out at the time of writing. The demonstrations have differed from previous protests in Iran in numerous ways. Firstly, the protests started outside of Tehran, beginning in Mashhad in Iran’s North East, and then spreading to numerous smaller towns and cities across the country. The main grievances were economic, with inflation in double digits and the economy (and consequently opportunities for youth) stagnating, despite international sanctions being lifted in 2017. Previous protests have focussed more on political issues and corruption. Although there was no immediate threat to Iran’s ~3.9mn b/d of oil production, the market was spooked and prices rose in response.”

“More fundamentally, extremely cold weather across the Eastern and Central US has increased consumption of heating oil in recent weeks, boosting demand. More generally, a continuation of the synchronised global growth seen in 2017 will also boost demand through the year.”

“With these factors in mind, we have revised our Q1 2018 oil price forecast up to $63/bbl. Despite the upwards revision, we still expect oil to move down from current highs by the end of the quarter. Although we expect some a geopolitical risk premium of ~$5-6/bbl to remain in oil, we expect the impact from unrest in Iran to dissipate, with the situation seemingly already calmed with no impact to oil infrastructure. Likewise, the colder weather in the US will be a transient factor, with demand for crude falling as refiners cut runs in response to temperatures rising from recent lows.”

“The main factor that will pull prices down from recent highs however is the inevitable supply response from US producers. Although the US oil rig count has fallen in recent weeks (-5 week-on-week in the last Baker Hughes Data), the true response of the US rig count to higher prices seen through November-December will not be realised until February-March, as discussed in our recent piece on the reactivity of US oil producers. With this in mind, we foresee a price correction downwards as the dissipation of transient factors and bearish upstream data from the US tempers oil’s march towards $70/bbl.”

“The $55-75 range for Brent is still very much at play.”