Oil prices open the year volatile on competing narratives

Oil prices are holding steady as the geopolitical risk premium balances against an expected slump in demand.
By Daniel J. Graeber Follow @dan_graeber Contact the Author   |  Jan. 2, 2018 at 10:05 AM
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Jan. 2 (UPI) -- Crude oil prices started 2018 with a lack of direction as unrest in Iran, one of OPEC's top producers, balanced against concerns for the world's top economies.

Iranian protests over the cost of living erupted late last week, but by the weekend had taken on a political tone. Iranian broadcaster Press TV reported that "more than a dozen people" have been killed across the country as of Tuesday.

Iran is one of the larger producers in the Organization of Petroleum Exporting Countries, and extended unrest would add a risk premium to the price of oil. With 157 billion barrels in estimated reserves, Iran ranks third among OPEC members, behind Venezuela and Saudi Arabia, respectively.

Geopolitical unrest could be a main contributor to a risk premium for crude oil prices this year, according to Ole Hanson, the head of commodity strategy at Saxo Bank.

"Renewed geopolitical risks -- of which we have had plenty during the second half of 2017 -- are likely to be the key source of support and one which could upset our call for stable-to-lower prices during 2018," he said in an emailed report.

But it was longer forecasts for economic trends that created headwinds early Monday. A snapshot of the Standard and Poor's Goldman Sachs Commodity Index from the U.S. Energy Information Administration found the index dropped 20 percent during the first half of 2017, but ended the year 16 percent higher than at the start of the year. Some of the petroleum-based products that make consumer fuels accounted for 24 percent of the index.

By the EIA's read, gasoline consumption in the United States, the world's largest economy, slowed down from 2016 to 2017 because of the increase on the price at the pump. Hanson, meanwhile, said crude oil prices enter the New Year looking for support.

"We also have some concerns about the Chinese economy in 2018 that ultimately could lead to lower than expected demand growth," he said. "U.S. motorists being faced with rising fuel costs could also trigger a slowdown in demand."

Markets were volatile ahead of the open of trading in New York, with key benchmarks moving between plus or minus a quarter percent. The price for Brent crude was more or less unchanged from Friday at $66.86 per barrel as of 9:16 a.m. EST. The price for West Texas Intermediate, the U.S. benchmark for the price of oil, was relatively even at $60.44 per barrel.

Markets in late December were supported by the outage at the Forties pipeline system, which carries about 40 percent of the oil and natural gas produced in the British waters of the North Sea. The outage forced a production shutdown at some area fields, but operator Ineos had the network back up and running at normal rates during the weekend.

In year-end commentary emailed to UPI, Chris Midgley, the global head of analytics at S&P Global Platts, said the global gap between supply and demand is narrowing. Investments of around $300 billion fund projects that don't come online until the start of the next decade.

"In the short term, 2019-21, it would appear that we might be heading towards a period of supply tightness and will be relying on U.S. onshore shale to respond to fill the gap," he said. "The World Bank's announcement that it will stop financing upstream oil and gas projects may have a significant impact on new projects."

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