Since August, the price of the international oil benchmark, Brent, has risen about 25%. Earlier this week, the Wall Street Journal reported that in the past month there has been a doubling in the number of bets that the price of a barrel of Brent will reach $100 by January 2019. Apparently, this is being fueled largely by expectations of dwindling oil exports from Iran. But we also have to consider that any move toward $100 oil may be driven largely by a speculative wave.
Daily Brent Oil Chart: August-October 2018
At this point, traders have to take into account the possibility that most of the 25% increase in oil prices has been due to speculation. Indeed, the geopolitical and fundamental conditions necessary to support this increase may not be evident.
Lately, media and analysts have been forecasting that the new U.S. sanctions on Iran’s oil industry will mean the disappearance of 1.5 million barrels per day of Iranian oil from the global market. This oil, the media has told us repeatedly over the past few months, is already starting to disappear.
The numbers definitely indicate that there has already been a drop in Iranian oil sales, but the extent of that drop is not clear. Some tracking firms show continued trade of Iranian oil in significant volumes. For instance, TankerTrackers demonstrates that India still bought well over 14 million barrels of Iranian oil in both August and September, despite signaling that it has reduced its Iranian oil imports significantly. TankerTrackers also showed that Japan still imported one million barrels in September, when it was supposed to be closing out its imports.
The simple fact is that we do not know how much oil Iran will be able to trade after sanctions come into effect, but indications are that Iran will not lose a full 1.5 million bpd, as some expected. And even if it did, given that this is already largely built into the price of oil, there’s a question of whether the sanctions would call for a new jump of $15 in the price.
As always, oil traders need to be aware of the fundamentals and the geopolitical intrigue, however, they should never lose sight of the momentum of the market and the movement caused by the market itself. If the market does go up to $100 per barrel (which would be an increase of more than 30% in four and a half months) part of that jump will be caused by momentum alone.
Author’s Note: WTI and Brent both fell almost 3% in U.S. trading on Wednesday. This may be a result of new information but it is also very likely just part of the hysteria from the U.S. equities market tumbling more than 3% the same day.