What’s driving oil prices higher? Lesson 124

  Crude Oil has rebounded in the last couple of days, WTI Crude today settled at 106.79 up 0.59%, but crude is still down about 2% in the last week and were still talking about $106, a barrel oil.

  There are a few things driving oil prices higher in today’s market. Iran is one with its concerns of a potential supply dislocation with that issue. There is also South Sudan, Yemen, Syria. All of these non OPEC sources also cut off-line. That’s a 500,000 barrel a day disruption of crude.

  There are also about 500,000 barrels a day off line in the global context , people abandoning the use of Iranian crudes, so about a Million barrels worth of supply implication is really what’s elevating this.

 The converse of this is that we’re seeing a pretty good demand implication of that higher price.

  Some think that the market will compensate for any volatility if the Straight of Hormuz were closed. There will be reaction if that happens. 20% of the world supply moves through the Straight of Hormuz. About half of that, you have relatively short term implications, in terms of being able to redirect those supplies with other pipeline systems. That still leaves about eight million barrels a day of a disruption. That would create an impact of upward in oil price.

 Just taking Iran off line, (oil exports are about 2-million barrels a day)  Our global strategic stocks have the capacity globally to satisfy an Iran short-fall for about twenty-four months. It just depends on how dramatic and how durable it is.

  The U.S. military has made it clear that The Straight of Hormuz blockage would only be a momentary period.

  These high oil prices (Nymex should be $90 - $100, Brent should be $100 - $110) do allow investors to position themselves for the opportunity. If the military strike against Iran, prices will move higher.

 If oil prices stay where they are, then look at EOG Resources (EOG 114.41), SM Energy (SM 78.17), Carrizo Oil & Gas (CRZO 29.10). These have or will transition in to much more exposure to the oil side.

  Bottom line on oil prices;

   Iran’s the wild card. Lets hope that we have a diplomatic solution through that issue. If you get that, you’re getting enough demand implication to get relief in oil price, in over the course of the year oil prices will move down $10 - $15 a barrel from current levels.

   Nymex at $90 - $100 and Brent at $100 - $110 are kind of the equilibrium levels in global context with geo-political overlay. This looks like where oil prices are headed.

  If prices stay at today’s levels, global growth and demand would be hindered, but the demand side of the the equation is what would move oil back to lower prices.

  Even with the disruptions mentioned here, there is still half a million to one million  barrels on non-OPEC growth. The demand side of the fundamental equation would remove the geo-political elements, moving us back to the lower price window.

 Bruce Cortez 

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