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Oil Bulls in Driving Seat

Crude oil futures have surged over 8% this week, rising from $67.50 to a high of $73 (highest level in over 3 years) amid a slew of supportive developments. Today’s OPEC monthly report stated that the cartels crude production fell by 201k bpd in March to average 31.96mln bpd, while world oil demand growth had been revised higher by 30k to 1.63mln bpd. Earlier in the week, the EIA revised higher their 2018-2019 growth forecast and interestingly cut their US oil production, albeit marginally, while the EIA also sees a market rebalance in 2-3 months, painting a rosier outlook for oil bulls.

Geopolitical Risk Premium Returning for Oil Prices

Judging by yesterday’s price action, which saw both WTI and Brent crude futures hitting 3-year highs, the most potent developments have been the rising political tensions over Syria, with potential US action (US-led airstrikes) in Russian supported areas, increasing the war of words between the US and Russia after sanctions were imposed.

Bullish Outlook for Oil Prices Amid Escalating Geopolitical Tensions

Chart by IG

Potential for Further Oil Price Gains

Given that tensions are likely to escalate in the Middle East provided the US conducts airstrikes, oil bulls may be awaiting to seek out more upside in crude prices. This would also be in-line with the Trump administrations anti-Iran strategy. As a reminder, it is now exactly a month (May 12th) until President Trump reviews the Iranian nuclear agreement, whereby the President has previously stated that the US will pull out unless a better deal is reached. The significance of this, is that if the Trump administration decide to pull out of the agreement, sanctions will be re-imposed on Iranian oil sales, possibly curbing as much as 500k barrels worth of exports. Subsequently, providing a further lift to crude oil prices amid shrinking supply in the oil market.

According to IG’s sentiment data, traders are short to long at 2.05 to 1 with trader’s further net-short than yesterday and last week, as such, this combination gives us a stronger oil bullish contrarian trading bias.

Will Saudi Arabia Hit Their $80 Price Target?

Since OPEC and Non-OPEC members agreed to curb oil production at the back end of 2016, oil prices have jumped 57% while the EIA predicts that the oil market will rebalance in 2-3 months’ time. However, OPEC’s main concern is the rise in US oil production, led by shale producers. The US is expected to produce up to 11mln bpd in 2019, overtaking Saudi Arabia and potentially keeping a lid on oil prices. Unless geopolitical tensions escalate, an unwind of the risk premium may keep $80 oil prices out of sight for now, as focus shifts towards supply and demand factors.

-- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX