Macro: Sandcastle economics
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Crude oil still supported, but uncertainty lingers
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil markets are jittery and difficult to forecast, and it all comes down to the uncertainties surrounding the ultimate impact of the US sanctions levied against Iran.
As far as the crude oil trade goes, the only thing that seems to be guaranteed is a potentially volatile Q4 with end-of-year price calls ranging between $70 and $100/barrel.
The reason for this uncertainty can be highlighted in one chart: Iran’s oil production. At this point we just simply don’t know the full impact of US sanctions on Iran’s ability to produce, let alone export crude oil.
Forecasts range from anywhere from a loss of 500,000 barrels/day all the way to 2 million b/d. The latter forecast, which helped drive crude oil higher on Monday, was given by one of the world’s biggest oil traders on that day in Singapore.
The increased tax from higher oil prices on the global consumer is unlikely to become a theme until 2019. There is no doubt, however, that given the current dollar strength some emerging market countries are already seeing oil prices in local currencies getting close to 2011-14 levels.
The technical and fundamental outlooks both point to higher prices in the short term with Energy Aspects forecasting in an interview with Bloomberg that Q4 could be the tightest quarter for the demand-supply balance in more than decade.
With Brent having shown little or no interest in challenging the breakout level at $80.50/b, we continue to feel comfortable with our Trade Idea from Monday to be long Brent crude oil.
It will be very interesting the see the next COT report due Friday after the close (see COT updates on my twitter account Sunday @ole_s_hansen).
It will cover the week to September 25 and show to what extend hedge funds added long positions on the break above $80.50/b.
The latest oil market updates
Oil gains 1% ahead of shortfall in Iran supply (Reuters)
Oil Brief for September 27, 2018 (Bloomberg)
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