With oil prices at their lowest quarterly level since 2008, energy investors have to be wondering what they can do to catch a break. They may actually get one, as the new quarter commences -- if the experts OilandGasInvestor.com talked to this week have it all figured right.
First, some background on oil prices, and how they’re trending this holiday week.
Oil prices climbed to their highest levels in two months, primarily on news that Iran once again is threatening to make good on a promise to block the Strait of Hormuz and keep hundreds of millions of barrels of oil from being shipped to global bourses.
About 30% of the world’s oil is transported from the Persian Gulf, and the U.S. has already responded to the threat by sending military equipment and personnel to the region to quell any attempt by Iran to block oil shipments from the Strait of Hormuz.
That scenario has oil traders on edge. Benchmark crude oil rose by more than $4, to $88 per barrel in commodities trading on July 3, its highest level since May 2012. Overall, oil prices have risen by $10 in a week’s time.
Oil Stocks Climbing
Through mid-day trading on Tuesday, July 3, oil prices were generally up on news that crude oil prices were on a definite upswing:
• BP Plc was up $0.12 or .3%, to $40.81.
• Chevron rose by $1.50 or 1.4%, to $107.36.
• ConocoPhillips were up $0.69 or 1.2%, to $56.42.
• Exxon Mobil Corp. rose $0.94 or 1.1%, to $86.28.
• Marathon Oil Corp. climbed $0.70 or 2.8%, to $26.00.
Source: Associated Press
That begs the question: Will oil prices continue to spike upward? OGI contacted some industry specialists to figure out if the current run-up in prices is temporary -- or if it’s the real deal. Here’s what they had to say:
Tyler Kocon, portfolio manager at Split Rock Trading -- We maintain that oil prices have been affected in recent trading for several factors:
- Increases in production spawned by domestic tight and shale oil production from areas like the Bakken and the Eagle Ford shale.
- Additionally, documented slowdowns in both China and the European Union have implied a drop in overall oil demand and consumption. This fact, coupled with a large-scale production increase, has depressed and may continue to depress the price of oil in the future.
- The upcoming enforced EU sanctions on the country of Iran (the world’s 5th largest producer of oil) will potentially bottleneck supply in the short term and has led to a price premium.
- A strengthening dollar (which is the pricing unit of crude oil) would impact prices if the price of the dollar increases due to further European weakness. An increase in the price of the dollar would effectively decrease the price of oil rather than raise it.
Our research department had a tentative average price target of $85/barrel on WTI crude oil through the early summer. Furthering that estimation, we estimate that WTI crude oil will eventually trade between $100-$110 per barrel for the remainder of the summer as the Iranian Oil Embargo and hostile rhetoric stemming from Iran regarding the closure of the Strait of Hormuz (where roughly 20% of the world's oil is transported through) creates an upward pressure on prices. Come mid-fall and for the rest of the year we see prices maintaining around $100 per barrel for WTI.
We maintain that as the price of oil rises internationally, greater demand will befall WTI-priced domestic oil and that the spread between Brent and WTI will narrow, making American oil companies much more attractive.
Bruce Bullock, director, Maguire Energy Institute, SMU Cox School of Business -- Right now, factors still point to more downside in oil prices than upside. The global economy continues to slow. Global oil production is at a record 91 million barrels a day, while demand remains at about 89 million barrels a day. Two factors could arrest the recent slide in crude price -- a major geopolitical event such as an Israeli attack on Iran or a large cut in production by OPEC.
Dr. Shawkat Hammoudeh, Drexel University’s LeBow College of Business -- There are two major scenarios for the WTI oil price until the end of this year:
1. The first scenario assumes the continuation of the current relation between the West and Iran and no major deterioration in the euro zone. This scenario allows for further modest weakening in the U.S., EU and the global economies. It assumes 2% economic growth in the U.S., a zero or small negative growth in the euro zone and about 3% growth in the world economy. Under this scenario, the regular gasoline price can drop from around $3.45 per gallon to around $3.25 by the end of the year. Some people think that the price under this scenario may go to $3 a barrel.
Corresponding to those prices of gasoline, the oil price can drop by $10 to settle round $70 a barrel. This price is supported by the costs of the offshore and the oil sands oil.
2. The second scenario assumes a material confrontation with Iran and a collapse in the euro zone economic growth. Here, the two events have opposite impacts on the oil price. But I think the geopolitical premium will dominate the negative impact of the collapse in the euro zone and the appreciation of the U.S. dollar. Here the geopolitical premium could make the price of oil jump above $150 a barrel and the price of gasoline come close to $5 a gallon.
Which scenario is more plausible? The first one by a probability of 85%, to 15% for the second scenario.
James DiGeorgia, publisher of the Gold & Energy Advisor -- Rarely have times been so “interesting” as now. Not only do investors face global economic uncertainty, but potential geopolitical chaos as well. We can hope that everything discussed in this issue resolves itself peacefully. But we must do more than hope for the best. We must also prepare for the worst.
At the risk of sounding crass, I believe that we as investors are obligated to plan our strategy for a Middle East conflict. We can’t do any¬thing to prevent war in the Middle East. But we can (and must) protect ourselves and our loved ones from potential fallout. If things come to a head in the Middle East, we could see massive moves in the oil market. A war in the Middle East could blow prices back up to $150 or beyond.
At the same time, we must also consider the potential fallout of the financial crisis in Europe. If Europe has a banking meltdown, oil prices could fall like a stone. So prices could explode upward, or implode downward, in a very short period of time. There’s no way to know in advance which sce¬nario will occur. Maybe neither one will.
Chris Faulkner, CEO, Dallas-based Breitling Oil & Gas -- Recently Javad Karimi-Qoddusi, a member of the Iranian parliamentary National Security and Foreign Policy Committee, said: "In line with this bill and Iran's sovereign rights, the Islamic Republic of Iran will not let oil tankers, which carry oil to the countries that have imposed sanctions against Iran, such as the European Union, the USA, and occupier Israel, pass through."
He added: "When they impose sanctions on Iran unfairly, the implementation of sovereign rights in Iran's internal and coastal waters is the least solution.” The embargo from the EU on Iranian oil started on Sunday. Its impact is already being felt and prices are beginning to surge. In addition, we have been in a deep recession now for four-plus years. Oil has maintained solid pricing levels despite this and concern over slowing demand from China and India. In my view, the oil markets will continue to maintain the present prices in spite of worldwide slowing. The existing price levels for WTI and Brent are sustained in spite of the economic weakness in the U.S., China and Europe.
To me, that says the oil markets are tighter and riskier than many would have us believe. Furthermore, the other side of this current round of global economic weakness is recovery. When it comes, oil is headed north and fast. In the U.S., an energy sector resurgence is under way. Shale and natural gas are evolving positively. The U.S. is on a long-term growth path with energy and the impact from this is going to be significant on the pricing indexes.
When we get to the other side of July 4th, we expect to see the evolution of the Persian Gulf threat from Iran and just how big an impact it’s going to have on the summer crude pricing.
I expect oil to maintain an average price of $94 per barrel on WTI and $108 for Brent going through the end of the year. I think oil is headed to $200 a barrel. Now that may take 15 years without any major incidents or 15 days if anything happens to Iran.
Anywhere you look, oil prices could be impacted by any one of a myriad of geopolitical events, among them Iran, the Eurozone debt crisis, the U.S. “fiscal cliff”, and any shift in demand from high-energy use countries like Brazil, Russia, India, and China (the “BRIC” countries). Right now, that volatility, especially in the Persian Gulf, is inching oil prices upward after a soft spring, price-wise. It looks like that will be the case for at least the rest of the summer.