Reignited Rally Sets Off Talk of $100 Oil

By Anonymous

Oil prices are again marching higher, prompting talk that crude could reach $100 a barrel for the first time since 2015’s crash.

Brent crude, the global benchmark for oil prices, jumped 4.1% in the third quarter to $82.72 a barrel, the highest level in nearly four years. Brent’s fifth consecutive quarterly advance marks its longest such streak since 2008. U.S. crude edged down from its most recent multiyear high, falling 1.2% to $73.25 a barrel last quarter, though it has risen in five of the past six weeks. Investors have grown more bullish ahead of Nov. 4, the U.S. sanctions deadline for companies to stop buying Iranian oil.

Sentiment was bolstered, too, by the recent decision of the Organization of the Petroleum Exporting Countries and its allies to leave production steady. That move, analysts said, convinced investors that the removal of Iranian oil from the market, along with supply disruptions in places such as Venezuela, will lead to large crude shortages.

The result: Brent is up 24% for the year so far and West Texas Intermediate, the U.S. gauge, has risen 21%.

“When you have a geopolitical risk backdrop like this, it just fuels bullish market sentiment,” said Michael Cohen, head of energy commodities research at Barclays. “The fundamentals of the market are tightening before some had expected.”

Further underpinning oil’s rally is investor confidence that a robust U.S. economy will continue to keep fuel consumption near record levels. That belief has prompted calls for oil prices to reach $100 again, a level Brent hasn’t hit since September 2014.

Reignited Rally Sets Off Talk of $100 Oil

Some of the men attending an OPEC meeting in Algiers on Sept. 23. Photo: str/epa-efe/rex/EPA/Shutterstock

While Brent would have to rise another 21% to reach the $100 level, this isn’t idle chatter: Bullish options that pay out if Brent hits $100 by January increased by more than 62% in the past week, Intercontinental Exchange data as of Sept. 27 by QuikStrike show.

Oil’s rally is also luring speculators. Hedge funds have boosted net bullish bets on Brent for five consecutive weeks, pushing them to their highest level since May during the week ended Sept. 25, ICE data show.

Some analysts estimate that about one million barrels a day of Iran’s roughly 2.5 million barrels a day of oil exports could ultimately be at risk from U.S. sanctions, removing more oil from the market after Iranian shipments have already been falling.

Saudi Arabia, the world’s largest oil producer and de facto head of OPEC, has insisted it can fill any supply shortfall created by the Iran sanctions. But some analysts say recent increases in output from large suppliers and production disruptions have eroded global spare capacity, the production that can be quickly turned on in an emergency.

“Without spare capacity, OPEC is relatively impotent in relation to preventing rising prices,” said Richard Robinson, manager of the Ashburton Global Energy Fund.

In the U.S., infrastructure bottlenecks due mainly to pipeline issues and worker shortages—particularly in prolific regions such as the Permian basin—have prevented production from rapidly growing, cutting off more supply from the broader market and leading to a nearly $10 gap between global and U.S. prices.

Traders also are bracing for a price surge that could cause a run-up in retail gasoline prices in the U.S.

How much pain there is at the pump could inject further uncertainty into the politics around oil, especially ahead of U.S. congressional midterm elections on Nov. 6. While President Trump in May announced that his administration would reinstate sanctions on Iran, the U.S. for months largely avoided the side effect of rising fuel costs, with oil prices flatlining this summer as Saudi Arabia and Russia increased production before turning up again.

Average American gasoline prices also have been largely steady after nearing $3 a gallon earlier this year, their highest level since 2014.

If gasoline prices leap, some analysts believe the Trump administration may come under political pressure to act, say by granting waivers to companies seeking to buy Iranian oil or dipping into the Strategic Petroleum Reserve, the country’s emergency oil stockpiles. The latter has historically been viewed as a last-ditch option in an effort to contain price rises.

Should the conflict with Iran ramp up, “I don’t see any barrier whatsoever for oil prices hitting $100 a barrel,” said Matt Badiali, research analyst at investment research firm Banyan Hill Publishing. “Going into the holiday travel season, that would be really frustrating for the American consumer.”

Aside from consumers, more expensive oil could threaten U.S. corporate profits and indirectly push prices for a variety of goods higher. If this stoked inflation, the Federal Reserve could feel pressure to quicken its pace of interest-rate increases.

Of course, the oil market is notoriously volatile. Some investors expect higher production from Saudi Arabia and Russia to eventually cool the current rally—something that happened this summer after a June rise in prices.

Markets around the world also have largely shrugged off the risk of an escalation in the U.S.-China trade dispute, which could crimp global growth and hurt demand for crude.

So moves on trade that either intensify or cool the dispute also could influence where oil heads into the end of the year.

“I don’t think anybody can anticipate how this all plays out in the next two months,” said Barclays’ Mr. Cohen.

—Christopher Alessi and Gunjan Banerji contributed to this article.

Write to Amrith Ramkumar at [email protected]