Oil prices fell on Monday, reversing some of last week's spike to a 3-year high, as investors fed the weekend airstrikes by the US, France and the UK on Syrian targets into wider risk calculations.
The US, French and British missiles launched on Saturday reportedly destroyed much of Syria's chemical-weapons capabilities, but left President Bashar al-Assad's conventional military intact.
With the US now focusing on new sanctions — US UN ambassador Nikki Haley said further sanctions were being discussed on Russian companies with dealings with Assad — many investors decided to take profits on Monday on the expectation that neither Russia nor Iran, would retaliate.
The sanctions details are expected to be announced by US Treasury Secretary Steve Mnuchin later on Monday.
On Monday, May West Texas Intermediate — the US oil benchmark — lost 58 cents, or 0.9 percent, to $66.81 (€54.35) a barrel after rising 8.6 percent last week, its strongest weekly performance since July 2017. June Brent — the international benchmark — dropped 68 cents, or 0.9 percent, on Monday, to $71.90 a barrel, having risen 8.2 percent last week.
Markets appeared to downplay predictions last week that oil would keep hiking on the back of Middle East tension and to focus instead on lower global production.
Anish Kapadia, founder and managing director of Akap Energy, for example, told CNBC on Friday he could see no reason oil prices would not hit $100 a barrel due to tensions in the Middle East.
"Crude oil prices have been on a rise primarily owing to production cuts from OPEC countries as well as Russia," Pranav Master, Director, CRISIL infrastructure advisory, told DW.
"In fact, the compliance on production cuts is over 100 percent with outage in Libya and Nigeria as well as financial crisis in Venezuela. This has reduced the inventory hangover, which was much above the trailing five-year average. However, the recent spike in crude oil prices to over $72 per barrel has been triggered by geopolitical tension in the Middle East. This coupled with seasonal crude oil demand is expected to keep prices elevated at over $70 per barrel over the next quarter. However, with gradual increase in crude oil production from the US, prices are expected to decline and stabilise at $65 per barrel by the end of 2018. Over the long-term, with continued substitution by natural gas and expected ramp-up in electric vehicles, crude oil prices are expected to be fundamentally under pressure," Master said.
"In our opinion, the market sentiment toward crude oil is very positive at the moment due to favorable revisions to fundamentals’ estimates and geopolitical risks," Daniela Corsini, CFA Macroeconomic and Fixed Income Research, Intesa Sanpaolo, told DW. "Over the next month, we expect that Brent crude oil could trade in a $68-74 range, at a $72 average, while WTI crude oil could trade in a $62-70 range, at a $67 average," she added.
"Examining supply and demand fundamentals, last week’s reports released by the most representative agencies (US EIA, IEA, OPEC) confirmed that the efforts from OPEC and non-OPEC allies are reducing global inventory levels," Corsini said.
Fundamentals and trade war issues
The rise in the price of oil was supported by a drop in production by OPEC and Russia, which largely complied with a 2016 deal to boost prices after a global glut, the International Energy Agency (IEA) said in a report last week.
The IEA said global oil stockpiles were running down and that the ending of the stock overhang that had previously lowered prices could support higher prices.
Demand, it said, was seen steadily expanding at an expected 1.6 million barrels a day this year.
After that, much will depend on the position OPEC and its allies take on extending output constraints beyond the end of 2018, Daniela Corsini, Macroeconomic and Fixed Income Research at Intesa Sanpaolo, told DW
Meanwhile, the IEA also warned that should the tariff announcements by Washington and Beijing lead to a trade war, global oil demand and the wider economy could be hit.
"The economic outlook remains supportive, but the trade dispute between the US and China is introducing a downward risk to the forecast," the agency said.
A 1-percent decline in global GDP growth would result in a reduction in demand growth by 690,000 barrels per day, the agency said.
The key players
Syria is a client state of both Russia and Iran and the risk of escalation is quite high. "I think that is what the market is worried about," John Kilduff, partner at hedge fund Again Capital Management, told the news agency Reuters. Syria itself hasn't exported oil since the start of its civil war in 2011, with Iran delivering 50,000 barrels a day of crude to Syria's Banias terminal.
US President Donald Trump has Iran in his sights, with a May deadline for him to extend the waiver on sanctions suspended by the nuclear deal. The deal was signed in 2015 between Iran and China, the US, UK, Russia, France and Germany and is meant to limit Tehran's nuclear program in return for the lifting of economic sanctions. Trump has criticized the deal and is expected to pull out on May 12.
"We now expect the US will impose new sanctions against Iran on May 12," Corsini said. "According to our calculations, new sanctions should led up to a 0.4 mb/d contraction in Iranian crude exports before the end of the year. In our opinion, OPEC will not expand its cumulative output by the same amount because we see Saudi Arabia (the only country endowed by sufficient spare capacity) likely to prefer overtightening crude markets ahead of the Saudi Aramco IPO than fueling a persisting oversupply amid an extraordinary US shale output growth," she added.
- Saudi Arabia
OPEC powerhouse Saudi Arabia has pushed its production beyond its OPEC target. Riyadh wants oil near $80 to pay for its ambitious policy agenda and support the valuation of state energy giant Aramco before a much anticipated initial public offering (IPO), which could happen this year. Last week's price rise was also supported by reports that Saudi Arabia's air defense forces had intercepted three ballistic missiles fired at Riyadh and other cities last Wednesday by Yemen's Houthi rebels.
Output by the non-OPEC member continued to accelerate, the IEA said. The agency said the OPEC cuts and high global oil demand mitigated against lower prices due to US production rises. Meanwhile, US shale is not seen as a threat to prices this year as pipeline bottlenecks in the Permian basin region mean US production will remain one-paced until new infrastructure comes online in 2019.
Russia exports about 4.5 million barrels a day of crude oil and another three million of refined products, more than any other OPEC member except Saudi Arabia.