Bank of America Merrill Lynch says Brent crude oil prices could reach $90 to $100 a barrel next year or maybe sooner. Goldman Sachs forecasts Brent crude at $82.50 by summer.
Both forecasts top Friday’s $70.70 close in U.S. crude oil prices, which trade at a roughly $5 to $6 discount to Brent crude. U.S. crude oil has already gained 17% year to date and 48% from a year ago. Why would oil prices move that much higher from current levels, which are already elevated?
They’ve soared in the past few weeks ahead of President Donald Trump’s decision on the Iran nuclear deal and continued to rise after he announced the U.S. was dropping out of the deal.
“In the short term, higher oil prices will probably be sustained,” said John Velis, macro strategist at State Street Global Markets, noting multiple reasons for the price support.
They include Trump’s decision to withdraw from the Iran nuclear agreement, Saudi Arabia’s desire for $85-a-barrel oil prices (a level the IMF says it needs to balance its budget), a production cooperation agreement between OPEC members (led by Saudi Arabia) and non-OPEC members (led by Russia) to support oil prices, the upcoming U.S. driving season (which tends to increase demand) and the upcoming intital public offering of Aramco, Saudi Arabia’s state-owned oil company.
“There are valid reasons for oil prices to be as high as they are right now, but they are potentially temporary,” Velis tells ThinkAdvisor.
John LaForge, head of real asset strategy at the Wells Fargo Investment Institute, agrees. “The trend tells me there is a little more left on the upside, but that may be only $1 a barrel.”
Determinants of Future Oil Prices
How much higher oil prices can go depends on several factors, many linked to supplies in the aftermath of the U.S. leaving the Iran nuclear deal, according to analysts.
Iranian exports, which total around 2.5 million barrels per day, could decline by 500,000 to 1 million barrels per day as a result of Trump’s withdrawal from the nuclear pact, which would be bullish for oil prices. But how much those exports fall will depend on the reaction of the countries that import Iranian oil: China, France, Russia, U.K. (the other five permanent members of the UN Security Council), Germany, Japan, India and South Korea.
The White House has said it will impose sanctions on companies that continue to purchase Iranian oil but allow them six months to wind down those contracts. South Korea, according to The New York Times, will seek an exemption from U.S. sanctions so that it can continue to import Iranian oil. China, already embroiled in trade disputes with the U.S., could potentially ignore or try to circumvent U.S. sanctions. And Iran could try to block oil shipments from the Mideast through the Strait of Hormuz, although the U.S. naval presence in the area would make that difficult to do.
Saudi Arabia, the largest crude oil exporter in the world, has said it will help fill the gap if U.S. sanctions on Iranian oil importers creates shortages, but it may not be willing to act alone. An OPEC source told Reuters last week that Saudi Arabia “will not in any way act independently of its partners.” Those partners now include Russia, one of several non-OPEC members that along with OPEC forged the so-called “Vienna Agreement” to monitor production in order to maintain balance between supply and demand.