Oil may rise to hit $75 per barrel on Middle East tensions

The increase is unlikely to sustain long term as spare capacity from Opec and Russia is expected to provide a key supply cushion

Iranian commander Qassem Suleimani, centre, was killed in an air strike near Baghdad airport raising tensions in the Middle East. AP

The oil price could rise to the $75 per barrel mark because of escalating tensions between the US and Iran, but the hike is unlikely to sustain long term owing to ample spare supply capacity of Opec and non-Opec oil producers as well as weak global demand for crude.

Oil prices rose more than 4 per cent on Friday, in a knee-jerk reaction to the killing of Qassem Suleimani, the head of Iran’s Revolutionary Guard’s foreign operations branch, the Quds Force, in a US rocket strike at Baghdad International Airport.

Brent, the benchmark for more than half of the world's oil, ended the trading session at $68.60 per barrel up 3.56 per cent, with West Texas Intermediate closing at $63.05 per barrel, up 3.06 per cent.

“Any larger sustained disruption to supply could send prices toward $75 per barrel or higher. But adequate-to-ample crude spare capacity, in addition to strategic oil reserves held by OECD [Organisation for Economic Cooperation and Development] countries, provide a key supply cushion,” Giovanni Staunovo, a commodity analyst at the Zurich-based, UBS said in a report.

Opec and Russia's spare capacity is around 3.3 million barrels per day, while the return of production from the Neutral Zone shared between Saudi Arabia and Kuwait could increase that spare capacity by another 0.3 million bpd over the next six to 12 months, Mr Staunovo added.

In addition, strategic oil reserves held by OECD countries – as well as growth in production from non-Opec countries like the US and Norway – is expected to offset any supply disruptions.

“We still expect an oversupplied oil market in 2020, particularly in the first-half of 2020. Hence, we believe Brent price moves above $70 per barrel are unlikely to be sustained over several months,” he noted. “This was the case in September when Saudi oil processing facilities were damaged and prices reversed fully within two weeks.”

Brent rose more than $69 per barrel after the mid-September attacks on Saudi Arabia’s oil facilities at Abqaiq and Khurais, which knocked out more than half of the kingdom’s oil output. The price of crude shot up but retreated once the production was fully restored and weak global crude demand overtook supply concerns.

Ole Hansen, head of commodity strategy at Saxo Bank, said the price hike seen after the killing of Suleimani is not driven by a supply disruption and could go lower once the simmering tensions deescalate.

“A price rise due to supply being disrupted as opposed to a demand-driven spike carries the risk of sending prices sharply lower once the situation stabilises,” Reuters reported, quoting Mr Hansen.

The Middle East accounts for about a third of the world's oil supply. Iran and Iraq produced 2.13 million bpd and 4.65 million bbd of crude in November 2019, respectively, and jointly accounted for nearly 8 per cent of the global oil supply in November 2019, according to the UBS report.

The report also highlighted growing concerns about the political stability of Iraq and oil production in the second-largest Opec producer after Saudi Arabia due to the rising tensions between the US and Iran.

“While a number of US oil workers have been evacuated from the Iraqi oil fields near Basra, the Iraqi oil ministry has highlighted that production and exports have so far not been affected,” UBS report said.

There are also worries that the Strait of Hormuz, a narrow waterway in the Middle East that marks the most sensitive transportation choke point for global oil supplies, could be disrupted in retaliatory attacks by Iran.