What does $85 oil mean?

What does $85 oil mean?

Oil prices were higher today ahead of upcoming U.S. sanctions on Iran starting next month. Oil prices continue to increase primarily on concerns that the sanctions on Iran and the collapse of Venezuelan production will lead to shortages, as traders worry about decreased supply.

As of 10:24am (Moscow time), International benchmark Brent crude oil futures were at $85.07 per barrel. That was not far off the $85.45 peak reached in the previous session, the highest since November 2014.

A senior analyst of 'Uralsib', Alexei Kokin, speaking to Vestnik Kavkaza, noted that the ban on Iranian oil may create a real supply shortage. "If you look at the OPEC output data, it indicates that Iran has already reduced oil production by 100 thousand barrels per day in September, apparently because buyers have started to refuse Iranian supplies. At the same time, Saudi Arabia is not able to increase production that fast, Russia's oil production is growing, but it will reach its limit in the near future. As a result, the market sees that no one can replace the Iranian oil completely, so prices rise," he explained.

"On the day of the introduction of sanctions, prices may jump up because of such sentiment, this should happen in October. One can expect the price to be higher than $90 per barrel. Although it will not last long, as production in Saudi Arabia and Russia will still increase in the medium term. In addition, it is necessary to take the seasonal factor into account: oil consumption is always reduced in the first quarter, due to which the expected deficit of the fourth quarter will turn into an excess in early 2019," Alexei Kokin stressed.

Deputy director of energy policy of the Institute of Energy and Finances, Alexey Belogoriev, in turn, drew attention to the fact that the market is concerned not only with the outgoing Iranian oil. "OPEC + showed no intention at the September meeting to respond to a possible oil shortage, although it was expected in terms of increasing production quotas for the participating countries. Such inaction of OPEC + led to a wave of price increases, which most likely will continue. As for the deficit, it is possible in November-December and in January-February of next year, if OPEC  does not respond to the situation again," he said.

However, until global output levels are restored, the consumption of commercial reserves will continue to raise prices. "The result is a short-term surge in prices, and the higher prices rise this year, the more they may drop next year. Daily quotes may be at $100 a barrel, but average annual values ​​are unlikely to be higher $70-75 per barrel even with a very sharp increase. When the sanctions are imposed, the prices may even decline a bit," Alexei Belogoryev concluded.

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