Risk premium returns to oil market
Singapore — A risk premium has returned to oil markets with a vengeance, boosting global price benchmarks as escalating fighting in Iraq threatens supply while political tension looms between the US and Iran.
After months of range-bound trading during which Opec-led supply cuts supported crude prices but rising US output capped markets, prices have moved up significantly this month just as demand looks stronger than at any point in recent months, especially in China.
Despite some profit-taking on Tuesday, Brent crude futures, the international benchmark for oil prices, were still at $57.79 at 1.48am GMT, 2.5% higher than last Friday’s settlement — and almost a third above mid-year levels.
US West Texas Intermediate (WTI) crude futures were trading at $51.76 per barrel, down slightly from their last settlement, but still about 2% higher than last Friday, and almost a quarter above mid-June levels.
The higher prices came as Iraqi government forces captured the major Kurdish-held oil city of Kirkuk on Monday, responding to a Kurdish independence referendum. There were also reports that Kurds had shut down about 350,000 barrels a day of production from major fields Bai Hassan and Avana due to security concerns.
"Kirkuk, the main city in the region, produces around 10% of Iraq’s total oil output and any [further] disruption could therefore have a significant impact on supply," said William O’Loughlin, investment analyst at Rivkin Securities.
Meanwhile, political risk consultancy Eurasia Group said, "Flows will remain vulnerable until an agreement is reached."
The escalating fighting in Iraq has spooked markets as it adds to rising tension between the US and Iran. Last Friday US President Donald Trump refused to certify Iran’s compliance over a nuclear deal, leaving Congress 60 days to decide further action against Tehran.
During the previous round of sanctions against Iran, about 1-million barrels a day of oil was cut from global markets.
With ongoing supply cuts led by oil cartel Opec further tightening the market, analysts were revising upward their crude price forecasts for the rest of the year and into 2018.
"We see Brent averaging $54 this quarter and $52.50 per barrel in [the first half of 2018], compared with our previous forecasts of $50 and $49.50 per barrel, respectively," Bank of America Merrill Lynch said. "We also adjust WTI to average $49 this quarter, relative to our previous forecast of $47 per barrel."
The US bank said that its "revised global oil supply and demand forecasts point to a sizeable deficit in 2017 of 230,000 barrels a day".
The bank said there was further upside potential to its outlook.
"Upside risks to our projections include geopolitics and a much tighter than expected refining capacity environment."