Why Oil Prices Could Still Go Lower
Crude markets had a panic attack in August and September that sent prices soaring. Sanity is now returning. Prices have fallen but are likely to move even lower over the next few months.
The panic attack was caused largely by Trump’s August 7 announcement that sanctions would be re-imposed on Iran. Anxiety about the effect on oil supply and prices was reasonable but the reaction was hysterical.
From August 15 to October 1, Brent December futures spreads increased $3.01 (175 percent) from $1.72 to $4.73. Brent prices increased $15.53 (22 percent) from $70.76 to $86.29 (Figure 1).
(Click to enlarge)
Figure 1. Brent Dec spreads collapsed from $4.73 to $1.52 since Oct 1 & are now less than when price rally began after announcement to re-impose Iran sanctions in mid-August. Front-month Brent down from $86.29 to $76.17 but still higher than $70.76 Aug 15 price. Source: Barchart and Labyrinth Consulting Services, Inc.
Then spreads and prices collapsed. By October 24, spreads had fallen from $4.73 to $1.52, less than when the price rally began. Front-month Brent price decreased from $86.29 to $76.17. Prices and spreads recovered slightly on October 24 closing at $76.89 and $1.76, respectively.
It seems unlikely that the correction is over. The timing depends on how long it takes for markets to fully recover from what Vitol’s Ian Taylor calls the supply fear factor. After 6 weeks of fear, markets must adjust to the reality that the “oil market is adequately supplied for now.”
Clearly markets are concerned about more than just Iran. Falling or uncertain output from the problem children Venezuela, Libya and Nigeria, and take-away constraints from the Permian basin are critical.
Iran, however, is different because it is a completely artificial supply crisis. It was a choice made by Donald Trump and his advisors. Markets are used to the uncertainty of its problem children but not to the apparent certainty of an executive decision. The reaction was consistent with the cause—certain and linear.
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