Oil Prices to Spike on the Back of Supply Risk?

Oil supplies are sufficiently at risk until end-2018 in a number of countries to warrant concern about a price spike and the potential consequences from it. Iran is at the top of the list in terms of probabilities. Citi analysts estimate that 0.6-1.2m barrels per day (b/d) of Iranian oil exports could be taken off the market due to the re-imposition of US sanctions.

On top of that, there are also supply risks of up to 800k b/d from Iraq given current domestic uncertainties and perhaps 1.5m b/d from Libya, Nigeria as well as Venezuela. The critical question now is the degree to which global supply and inventories can temper these potential supply losses come November. Citi analysts believe the potential losses may not be completely supplanted.

However, non-OPEC countries are growing fast and can possibly turn the tide to a large degree – both in the short and medium term. In total, this could be some 2-3m b/d a year for the next few years. Indicative growth rates over time of +1.5-2m b/d a year from the US as well as +0.2-0.3m b/d respectively from Brazil, Canada and Russia may be expected.

Citi analysts reiterate their base case for oil prices: Brent prices may rise through year-end to average $79 as Iranian sanctions are restored and fall through 2019 to end the year at $62. Citi also expects a spike to over $90 before settling at $83 by end-2019, although potential disruptions could once again push prices some $20 above Citi’s base case.