Global investors have suffered whiplash in oil markets this week. On Wednesday, pressured by concerns over global growth and growing US stockpiles, Brent crude dropped 3.7% to a five-month low. On Thursday, crude bounced back 2.4% after reports of attacks on tankers in the Gulf of Oman near the Strait of Hormuz. The US has blamed Iran for the attacks, an assertion which has been strongly denied.
But while two-way volatility remains a risk, we think that supply and demand fundamentals will support oil prices and that the 18% drop in prices since the April highs is overdone. Reuters reported on Friday that OPEC and Russia are close to a deal on long-term oil supply co-ordination. OPEC, in our view, should have sufficient pricing power to bring prices back to USD 70/bbl in 2H19.
Depressed oil production from Iran and Venezuela and ongoing high compliance among OPEC and its allies to the production cut deal should keep the oil market tight.
We expect oil demand growth of 1.2 mbpd this year. An economic slowdown if trade tensions escalate presents a risk to oil demand growth, which would require further OPEC+ output cuts to balance the market. But our base case is for a US-China trade deal to be reached eventually, which would alleviate global growth concerns.
Geopolitical tensions in the Gulf of Oman could disrupt oil supplies through the strategically important Strait of Hormuz. The market has room to price in a greater risk premium if US-Iran tensions in this crucial shipping area worsen.
We anticipate an undersupplied market in 2Q and 3Q for crude and forecast Brent crude at USD 70/bbl and USD 67/bbl in six and 12 months respectively, compared with USD 61/bbl currently. In the risk case, oil prices would likely weaken if demand growth were to be reduced by an economic slowdown to 0.5–0.7mbpd.
But we would expect the greatest impact on front-month prices with longer-dated Brent oil futures prices likely to stay anchored at around USD 60/bbl.