ETF Securities Research Blog

Oil above $50 is sustainable

The Brent oil price today touched $50 per barrel for the first time since November 3rd 2015. The inevitable disappointment at the OPEC meeting in Vienna next week presents some downside risks but a burgeoning supply deficit in Q3 2016 implies oil above 50 is sustainable.

$50 per barrel is a key psychological level but also a technical one. Oil spent several months testing this level before breaking lower in November, thus the opposite may happen now. But the upwards momentum in the oil price is also likely to be interrupted by the Vienna meeting scheduled for 2nd June where a production freeze is unlikely to be agreed.

Iran is keen to achieve a post sanctions production target of 4 million barrels per day, but with existing infrastructure it is unlikely to achieve this without, as the Iranian officials have stated, over $100 billion spent on upstream investment. Some of this investment will have to come from foreign investors who remain reluctant to participate due to Iran’s past history of committing to nuclear deals. Several international oil companies have signed memorandum of understandings with Iran but these have been simply to access more information rather than a commitment to invest. Furthermore, the sanctions that remain in place make investment problematic. As it will take time for foreign investment to filter through, Iran is likely to not agree to a production freeze any time soon.

Disappointment in Vienna is likely to lead to the oil price slipping, although this is likely to be short-lived. Most OPEC nations’ production is currently falling with the exception of Iran and Iraq. So from a market balance perspective it is unlikely we will see any rise in global production. In fact, if it is assumed that global production is frozen at current levels, current demand growth projections by the IEA suggest oil will fall into supply deficit in 3Q 2016.