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Oil Price Forecasts Show Crude Stabilising Next Year but Others are Betting on Big Gains

© Goroden Kkoff, Adobe Stock

- Oil price to stabilise amid rising U.S. supply says Barclays.

- But risks are to the upside given geopolitical environment.

- Although, TD Securities has doubled bet on Brent at $90.

The oil price is likely to stabilise once into 2019, according analyst at Barclays, and risks to those projections are slanted firmly to the downside but not everybody got the message as some strategist are now betting heavily on a sharp increase in prices over coming months. 

After entering January at $66 per barrell, oil has had a volatile year, with prices peaking at $86.65 in early October only to trade all the way back down to $72 by the beginning of November. This has seen what was once a near-20% gain taken back down into the single digits.   

Now, with U.S. sanctions prohibiting the purchase of Iranian oil by non-exempt countries and organisations set to come into effect on November 04, and with a series of headwinds set to confront the global economy in 2019, the outlook for prices is ambiguous at best. 

"We expect Brent to average $72/b next year ($65/b WTI), unchanged from last month, but see price risks skewed to the upside, especially in Q1 and Q4 2019," Michael Cohen, an analyst Barclays. 

Saudi Arabian energy minister Khalid Al-Falih told Russia's Tass earlier in October the kingdom's leadership is in favour of making the partnership between the Organization of Petroleum Exporting Countries (OPEC) and Russia permanent.

He also said Russia could even assume the leadership position because it is a "heavyweight both in terms of production and in terms of political influence". 

Both Russia and the largely-Arab bloc have worked together for two years in order to stem the 2014-2016 decline in prices and more recently, to force them higher. 

Both countries have agreed to replace oil production lost from the market because of the U.S. sanctions against Iran but should political concerns mean the two prefer to see prices higher next year, then Barclays' forecast would prove too low.

"If the Saudis aspire to $90 because of recent events and if Nigerian or Venezuelan output falls more than we assume, then we could be back above $80/b sometime next year," says Cohen. 

Cohen says Barclays expects a flat performance from oil in 2019 in spite of the geopolitical environment because U.S. shale production is likely to ramp up, replacing some American demand in the global market with increased supply.  

The implications for the global economy stemming from 2018's earlier price increase have been significant because the once double-digit move has pushed inflation higher right the way across the developed world. 

U.S. inflation almost reached 3% during the summer of 2018, while the U.K. consumer price index has risen from 2.4% in June, to 2.7% by September. 

Eurozone inflation, which has long been missing in action, climbed to 2.2% in October from 1.3% in January.

This matters for economies because when inflation rises without a corresponding increase in activity, it can push real GDP growth lower.

Furthermore, central banks are obliged to use interest rates and other policy tools to keep inflation levels below target rates in their respective countries. 

Few of the central banks out there can influence oil prices but that doesn't mean some won't still raise rates in response to oil-induced inflation, particularly if they see other factors adding to domestic price pressures.

To the extent that interest rate changes would be inappropriate if not for the inflation generated by rising oil prices, then the adverse economic impact coming from the oil market could be twofold in some countries. 

"We double down on our Brent crude trade adding a further 137 lots at $72.80, as we hold a strong conviction towards higher prices given the asymmetric risk profile generated from Iranian sanctions in the coming months," says Bart Melek, head of commodity strategy at TD Securities

The TD Securities team have been betting on an increase in the price of oil ever since the middle of October, having bought close to $10 million of futures contracts a fortnight ago, targeting a move up to $90 per barrell. They doubled that bet on Thursday.

Melek says there is little fundamental justification for October's fall in the price of oil. He suggests all of the adverse move was driven by factors that the market was already aware of and that there are number of reasons to think prices can rise rapidly again over the next three months. 

"We continue to see substantial risk asymmetry as OPEC's spare capacity is nearing levels last seen with $100/bbl oil prices, while upcoming elections in OPEC regions could add to additional disruption risks. Meanwhile, the recent build in inventories was likely due to outsized PADD2 maintenance in the US," Malek writes, in a note to clients Thursday. 

Prices of Brent crude oil futures were quoted 0.10% lower at $72.79 during the London noon Friday, and are now up by 8.85% for 2018.

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