Oil Balance Between Supply Glut and War Premium

Petroleum prices have been coiling in recent months. US brinkmanship with Iran adds a premium, while the inexorable rise in US production favors more discounted values.  If war breaks out the upper $60’s to upper $70’s is the logical target zone for WTI Crude Oil. Should the war risk be removed, then Oil in the lower $40’s would be the downside risk this year. The market calm in the wake of several provocative Iranian acts seems to assume the US and UK will not retaliate against Iran’s dare and double dare. Iranian actions of shooting down a drone, bombing Oil tankers, capturing a UK tanker, mining the Persian Gulf, dictating impossible parameters to negotiate and threatening war have been met with steely silence by the US and UK. We assume our militaries are biding their time to achieve maximum strike capabilities before choosing what hostile act to respond to and when.

With the global economy in a slowdown and US production slated to add another Million barrels a day of production each year, almost regardless of price, there is little Russia and the Saudis can do to elevate prices through output quotas. The US is the swing producer for the foreseeable future. However, we feel war with Iran is still a high probability this year. An Iranian war would provide a temporary boost to prices, until the threat of halting 20 percent of the worlds Oil shipped through the Persian Gulf had been eliminated. Oil and natural gas continue to be in a fundamental Bear market with near term upside risk due to hostilities in the Middle East.

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