In a moment sprinkled with some irony, on Thursday West Texas Intermediate oil prices almost returned to a price not seen since the infamous “Thanksgiving surprise” in 2014.
WTI reached $71.89 in intraday trading, and closed up $0.23 at $71.37/bbl. Not quite to $72, but close.
The last time $72 oil was traded was November 28, 2014, the day OPEC decided not to play the traditional role as swing producer and instead flooded the market with its production.
It has taken more than three years for the price of oil to recover to this level, though oil prices are still well below the triple digits seen in the first half of 2014.
Iranian tensions, Israeli military actions spark concern
Oil prices have been boosted by geopolitical events, as uncertainty in Latin America and the Middle East drove up prices. The most prominent development has certainly been the deteriorating relations between the U.S. and Iran, culminating with President Trump announcing the U.S. will pull out of the 2015 nuclear deal and reimpose sanctions.
These sanctions could severely curtail the volumes of oil Iran is able to ship overseas, though the volumes affected would be uncertain. Iranian exports fell by about 1 MMBOPD as a result of previous sanctions, but those had very strong international support. Analysts vary widely, but forecasts of the impact of these new sanctions typically range from 200 MBOPD to 600 MBOPD.
Additional geopolitical risk comes from the rising tensions between Iran and Israel, which have flared up in recent weeks. The countries have each made military strikes at the other’s emplacements, and many fear these could escalate into a broader war. Such a conflict would certainly play havoc with oil prices, as previous Middle Eastern conflicts have brought large jumps.
500 MBOPD from Venezuelan imperiled
However, Iranian considerations are not the only major developments, and the continuing decline of Venezuela may be accelerating. An international arbitration tribunal recently ruled ConocoPhillips was due over $2 billion from the Venezuelan NOC PDVSA, a judgement that Venezuela is almost certain to reject.
Conoco is not simply waiting for PDVSA to pay up, though, and is taking the situation into its own hands. The firm has moved to confiscate PDVSA Caribbean assets, targeting facilities on Curacao, Bonaire and St. Eustatius. These facilities are very important for PDVSA, and play key roles in processing, storing and blending oil for export. Venezuela is instructing its suppliers to ship oil elsewhere, as Conoco may seize the oil at the locations as well.
According to Reuters, these account for about one quarter of all Venezuelan exports, so disruption would be a major event. The Wall Street Journal estimates the dispute with Conoco may cost Venezuela 500 MBOPD, or as much as a new round of Iranian sanctions. Further Venezuelan sanctions may appear in the wake of the nation’s election, which has been heavily criticized by U.S. officials.
Mark Papa sees oil strengthening in coming years
Even discounting the geopolitical risk, major figures in the oil and gas business are predicting higher future prices. Centennial Resource Development (ticker: CDEV) Chairman and CEO and former EOG head Mark Papa outlined his thoughts on the overall markets in a conference call yesterday. “In 2018 or 2019 we’ll see just a further constriction in global supply and demand,” he said, “even if you exclude this Iranian sanction situation.”
“So even at the current $70 WTI price level I see a strong possibility of further strengthening in WTI over the next the next couple of years…Yes, there is certainly a price when we would lay on some WTI hedges, but at this point you know I wouldn’t divulge what that price is, it would be a fluid situation, but I can tell you that price is not $70.”
