[Salon] Oil: In Support Of My Forecast - ArabDigest.org Guest Post

Oil: In Support Of My Forecast Summary: the price of crude has fallen still further since I revised my year-end forecast on 22 June. It may yet go further still thanks largely to an accumulated glut of oil now exiting the Gulf. However, this “supply wave” may bring no more than temporary relief from an otherwise bullish market. We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast (with Jim Krane) here. I last wrote about oil as recently as 22 June, ending several weeks of sitting on the fence after I had abandoned my 8 January forecast for Brent crude at year-end of US$55 per barrel (pb). Since then, the price of Brent has dipped from around US$80pb to US$73pb, i.e. pretty much where it stood immediately before 28 February. This suggests not so much a shift of market sentiment — which has consistently ‘undershot’ analysts’ forecasts of record highs — as a consolidation thereof, borne out by there being barely a flicker in markets in response to last week’s renewed exchanges of fire between Iran and the US. As things stand it does indeed look as if the doom-mongers got it wrong. Especially since if last week’s flare-up told us anything, it is that (at least until the US midterms are out of the way) Donald Trump is willing to offer/engineer up-front concessions to keep the Iranians at the negotiating table, e.g. Qatar’s release of US$6bn of frozen assets which Tehran acknowledged publicly on 28 June and which comes on top of the suspension of US oil-related sanctions. Driven by a temporary supply wave from clearing Gulf backlogs and suspended Iranian sanctions, Brent crude prices have dipped to $73 per barrel, confounding initial worst-case regional scenarios. Consistent with this, according to Lee Harris and Alice Hancock writing in the 25 June edition of the Financial Times: The price of insurance for vessels passing through the Strait of Hormuz has fallen by more than half over the past six days, reducing costs for individual ships by hundreds of thousands of dollars. Premiums for hull war insurance dropped from about 5 per cent of the value of a ship to 2 per cent after discounts were included…. Furthermore, although J D Vance’s claims about the amount of oil now flowing out of the Gulf may be somewhat overblown, independent sources such as Kpler confirm that a backlog of several hundred vessels in total is starting to clear, even if this is still at a rate well below the pre-war daily average of 135 passing through the Strait. However, this outflow alone is a good reason not to change my forecast (again!). Couple it with something between 130 and 150 million barrel of crude which Iran is rushing to get to market following the aforementioned lifting of sanctions (with, no doubt, more to follow as the Iranians look to boost output) and I have to agree with top oil analyst Amrita Sen that the current dip in the price of crude is being driven in significant part by a “one-time supply wave.” It remains to be seen whether Ms Sen is also correct in saying that this “is masking a structurally bullish market.” Nevertheless, it is worth reiterating points I laid out in the 22 June Newsletter which support this view, as follows: Despite the uptick in the number of vessels leaving the Gulf, even if Iran desists completely from attacking ships using the channel skirting Oman, the backlog is still going to take some weeks to clear, meanwhile restricting the return of empty tankers; Under the terms of the MoU, Iran was supposed to de-mine the Strait within 30 days which, with the clock ticking down rapidly and 80 or so mines reportedly still lurking in the major shipping corridors, is clearly not going to happen; As Saudi Aramco’s CEO Amin Nasser said in mid-June, getting the global tanker fleet realigned with the pre-war pattern of movement will take weeks, if not months… …that is, if it happens at all when owners may prove just as reluctant to send their ships back into the Gulf as they have been to use the Bab-El-Mandeb-Strait since the US’s deal with the Houthis; Shortages of marine fuel in Asia in particular present an additional barrier to getting ships to where they are needed; Storage tanks which are close to overflowing throughout the Gulf — Saudi Arabia and, possibly, the UAE excepted — have to be emptied before production can restart in earnest; The 10,000 or so of the region’s 36,000 wells which have been taken offline as a result of the war have to be brought back into service, which can be technically challenging with older wells in particular; and, Call them what you will but agreement has to be reached over Iran’s contentious bid to levy charges on all vessels passing through the Strait. On top of all these hurdles, we also need to consider the impact of Ukraine’s attacks on Russia’s oil infrastructure. These have escalated hugely since I first flagged them as a substantial threat to global supply in the 22 December Newsletter. For now the resultant shortages are mainly being absorbed domestically; but, with parliamentary elections due in mid-September and the Kremlin’s United Russia party underwater in the opinion polls, this may have to change at the expense of exports. Finally, there is the question of replacing reserves — both strategic and commercial — which have been seriously denuded during the war. Take China which, by cutting its imports of crude by around three million barrels per day (bpd) since the war started, made a huge contribution to avoiding an even higher price spike globally. To make up for the shortfall in imports, refiners have been tapping commercial inventories at a rate of at least 1mbpd since the start of May. Although the ongoing move away from oil-based transport to electrification means that we may never see the pre-war import level of 9.3mbpd again, these stockpiles are still very likely to be replenished as soon as possible…as are inventories and governments’ strategic reserves worldwide. In conclusion, I only recently came upon the US Energy Information Administration’s 8 June Outlook in which it forecasts Brent at an average price of US$89pb in 2026Q4 and US$79 through 2027. This is broadly consistent with my 22 June forecast of US$85pb on 31 December to which I am assuredly sticking… for now.