Predictably (and also thankfully, because you know, this is like Ron Burgundy - "kind of a big deal"), analysts are scrambling around to determine what the future holds for crude prices in the wake of Donald Trump's probably ill-advised decision to exit the Iran deal.
Of course folks have been gaming out scenarios for what that decision might mean for Iranian supply for a year now, but predicting what it might mean for crude prices had to wait on Trump. Because depending on what else was going on when he finally pulled the trigger (e.g., U.S. inventories, how much "progress" Venezuela has made on the way to becoming a failed state, how determined the Saudis are to drive up prices ahead of the Aramco IPO, whether or not pressure on the ruble from U.S. sanctions ends up changing the decision calculus for Moscow vis-à-vis the cuts, and on and on), the loss of Iranian barrels could imply any number of things for the broader market.
Well now that Trump has officially rammed his (tiny, tiny) finger into Khamenei's eye, everyone gets to start making predictions about prices. One of the complicating factors here is that oil had already risen to its highest levels since 2014 prior to the decision. So you know, how much of that is the so-called "Bolton premium" (read: geopolitical risk premium to account for the possibility that John gives Iran a ride on his infamous war-'stache) and how much is fundamentals-based? Spoiler alert: there's no way to answer that question definitively.
Obviously, there are too many embedded contingencies here to make any semblance of an "educated" guess (for one thing, it's possible that under pressure from European allies, Trump could moderate his stance and there are also a number of reasons to believe Iranian supply might just be routed elsewhere if Europe doesn't take it), but it's at least conceivable that if the U.S. takes an aggressive approach to the secondary sanctions related to Iranian crude and Venezuela continues down the path to a complete economic collapse, that prices could surge. Especially if demand holds up.
Earlier this week, Bernstein suggested that $90/bbl could be around the corner in a "worst case scenario" and with that, the question was: who on Wall Street would be the first to go out on a limb and raise the specter of $100?
Now we have the answer: it's BofAML. To wit, from a note out Wednesday:
Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices. As a result, we project an oil market deficit of 630k b/d in 2018 and 300k b/d in 2019. The deficits should push OECD oil stocks down closer to 2.6bn barrels by 4Q2019. With inventories set to drop below 5-year normals, we raise our average Brent forecast for this year and next to $70/bbl and $75/bbl respectively. We also introduce a 2Q $90/bbl Brent price target for 2019 and see a risk of $100/bbl oil next year, although we are concerned that these market dynamics could unfold over a shorter timeframe.
While the Saudis support Trump's decision on Iran, they're also pretty keen on seeing higher prices in the interest of driving up the valuation on Aramco and also for other reasons tied to the Kingdom's fiscal position and financing the ongoing (and seemingly intractable) conflict with the Houthis in Yemen (bombs ain't cheap, yo!)
And because there's only so much money you can extort from your relatives on the way to replenishing your reserves, oil prices need to rise even if that entails otherwise uneconomic U.S. production comes back online or is further emboldened.
Given that, the assumption that Riyadh is going to be willing to step in and replace any lost Iranian barrels in the interest of keeping prices anchored seems a bit tenuous - no matter what the official word from the Kingdom is.
You've got to think Trump is going to be pretty damn pissed off if a surge in oil prices ends up undermining the "tremendous, bigly, big league" economic renaissance he thinks he's ushered in for America. To be clear, there is absolutely nothing "tremendously" anomalous about the quarterly GDP numbers we've gotten under Trump and the unemployment rate was already "tremendously" low when he took office.
But in that "very good brain" of his (resting as it does beneath that rusty Brillo pad he wears on his head), we're witnessing the most spectacular stretch of economic growth the world has ever seen, and in the event surging oil prices imperil that, he's exceedingly unlikely to look in the mirror when it comes to finding fault.
Rather, what he'll do is blame OPEC. And if you don't believe me, just ask him:
So I don't know.
I'd be willing to pay more at the pump for a while if it means getting to watch Trump pretend like he has no idea why crude suddenly surged to BofAML's $100/bbl "risk scenario" on the way to screaming at the Saudis on Twitter and demanding that Russia oppose further production cuts.
How about you?