Crisis in Crude: Will Oil Super Spike to 2008 Financial Crisis Levels?

Jul 17, 2018

Crude oil update Straits Financial_header

Will OPEC stave off a supply crunch? This is a question on many traders’ minds as they consider the potential of an oil super spike similar to the 2008 financial crisis. As tariffs take effect and talk of a recession and other political turmoil continues to rattle equity markets, oil and energy markets are adapting, evolving and transforming in ways that will shape the future and affect prices in the near and short-term.

This article will examine some of those factors evolving the energy markets including sanctions in Iran, analyst price predictions, China’s import quota, alternative energy developments and how to access crude oil and energy markets with Straits Financial.

Sanctions in Iran

In May, the US President made a bold and contentious move by abandoning the 2015 Iran nuclear deal. The US State Department announced oil buyers must cut off Iranian crude imports by November 4, 2018, and this accelerated oil prices higher. Now, the Iranian government is threatening to close down the Straits of Hormuz if Iranian exports are indeed curbed by the US.

The Straits of Hormuz is a crucial shipping artery for oil shipments from the Middle East and most of the crude exports from Saudi Arabia, the UAE, Kuwait, and Iraq pass through this channel. Almost all of the liquified natural gas (LNG) shipments from Qatar, the world’s largest exporter, travel through this waterway. It is not the first time Iran has threatened to close down the Straits of Hormuz, and many traders are worried and skeptical at the prospect of it closing, if even temporarily.

Crude Oil’s Ten-Year High Anniversary and Price Predictions

Another issue on traders’ minds is that it has been ten years since crude oil hit its all-time high of $147 a barrel in July 2008. The timing can seem ominous with current market events, price movements, analyst predictions, and OPEC actions; in the 2nd quarter of 2018, crude oil has rallied 14%, and members of OPEC have agreed to increase production in July by 1 million barrels a day.

This week, research firm Bernstein published a report saying reinvestment in oil reserves is the lowest in a generation and prices could ultimately skyrocket to $150 a barrel as a result. Analysts at Bank of America Merrill Lynch are predicting that oil prices will reach $90 a barrel by the second quarter of 2019. If Iranian oil is removed from the market, some at Merrill are even speculating that crude oil could ultimately climb to $120 a barrel. Morgan Stanley, on the other hand, expects that Brent Crude specifically will average $85 a barrel over the next six months, more than $7.50 higher than its previous estimate.

China’s import quota

China’s import quota for 2018 is up more than 30% from 2017 by roughly 60 million tones of crude. Although refineries that are operated by state owned companies such as Sinopec, PetroChina, CNOOC and Sinochem do not need quotas to import crude oil, independent refineries and those operated by state owned companies do.

China’s influence on crude oil cannot be understated. With the recent launch of INE Crude Oil futures, China is closer to achieving pricing power in the world’s most important energy contract. In addition to launching crude oil futures, China and India have been discussing the formation of an Oil Buyers Club to challenge the influence of OPEC. It is being reported that part of China and India’s mission will be to quicken the adoption of electric vehicles to depend less on crude oil.

Electric vehicles

Oil industry executives are reported to be slightly unsettled as electric vehicles are becoming more popular and China is making strides moving forward in this arena. Yet, this does not come without struggles. Elon Musk, the outspoken founder of Tesla Motors, announced this week Tesla would be building a plant in Shanghai to produce 500,000 vehicles a year, but, because of tariffs, they will be raising the price of their cars in China.

In terms of long-term demand, Bloomberg issued a special report recently called “Electric Vehicle Outlook 2018” in which they stated: “Our latest forecast shows sales of electric vehicles (EVs) increasing from a record 1.1 million worldwide in 2017, to 11 million in 2025 and then surging to 30 million in 2030 as they become cheaper to make than internal combustion engine (ICE) cars. China will lead this transition, with sales there accounting for almost 50% of the global EV market in 2025." While the long-term growth prospects of electric vehicles are robust; in the near-term, there is still substantial demand for traditional ICE vehicles, which will drive crude oil demand, especially during the summer months as the political, and supply issues unfold.

Currently, WTI crude is trading at a discount to Brent, and one Goldman Sachs' analyst stated that US crude volatility would remain high until later in 2019 when new pipelines become accessible. On Wednesday this week, Brent dropped the most in 2 years (more than 6%) after Libya announced it would reopen four export terminals that have been closed since June. This price action has signaled to traders that crude is undergoing a very volatile time and each announcement regarding supply and demand factors seem to rock and rattle oil markets.
Brent vs WTI Crude Oil Futures

Trading Crude

With all of these different factors at play, and volatility increasing, having access to all of the international crude futures markets gives traders an edge in energy markets. At Straits Financial, we provide access to all the major crude oil futures contracts including Medium Sour Crude Oil at the INE, West Texas Intermediate Crude Oil at NYMEX, and Brent Crude Oil at the ICE exchange. To read more about the new INE crude oil futures contract, please read our previous exclusive report here.

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