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Indicators for key commodities remain stable: expert

Oil&Gas Materials 8 May 2018 14:23 (UTC +04:00)
Indicators for key raw commodities remain stable in the current quarter, says Ole Slot Hansen, head of department of strategy at Saxo Bank.
Indicators for key commodities remain stable: expert

Baku, Azerbaijan, May 8

By Anvar Mammadov – Trend:

Indicators for key raw commodities remain stable in the current quarter, says Ole Slot Hansen, head of department of strategy at Saxo Bank.

However, Hansen told Trend May 8, the situation in the market was complicated due to tensions in the trade sector and geopolitics, as well as the strengthening of the US dollar.

The increase in geopolitical risks caused by the possibility of Trump's making a decision to withdraw from the nuclear deal with Iran on May 12 favorably influenced the energy sector, especially crude oil prices, which, Hansen says, are supported thanks to the restrictions on production set by OPEC and Russia, and the stable demand. As a result, it is possible that either the range of revenues from crude oil sales will expand, or the risk premium that has been increasing in recent weeks will reduce.

"In the next few days we can expect probably the most important event after the conclusion of the agreement between OPEC and Russia in December 2016 on the reduction of oil production to maintain the price level. Until May 12, the President of the United States Donald Trump will make a decision about Iran. This is a deal concluded on June 14, 2015 between Tehran and six world powers, as a result of which sanctions on Iran were lifted in exchange for limiting the country's nuclear program. Trump's decision to withdraw from the agreement will create a risk of an abrupt jump in world oil prices, which, in the end, may be counterproductive given its impact on global growth and inflation. Other parties to the deal favor retaining it. At the same time, the re-imposition of US sanctions will have a negative impact on Iran's ability to conduct financial transactions in US dollars. Even despite the fact that Iran does not export oil to the United States, America's withdrawal from the deal could lead to a complete cessation or, at best, a reduction in demand from European allies of the United States, Japan and South Korea, that is, to a repetition of the situation of 2012-2015, when sanctions were imposed on Iran," Hansen said.

The lifting of sanctions in early 2016 allowed to increase the volume of Iranian oil production from 1 million barrels per day to 3.8 million barrels per day. In case of repeated imposition of sanctions without increasing production by other OPEC members, the daily volume of production may decrease by about 300,000-500,000 barrels of Iranian oil.

Hansen noted that Brent oil price, which is an international price benchmark, rose significantly against the backdrop of the continuing geopolitical risks caused by the confrontation between the United States and Iran, as well as due to the continued decline in production in Venezuela, which attracts the most attention. In addition, he said, in the first quarter there was a high level of global demand, and combined with the retention of production limits set by OPEC and Russia, which directly declare the target price of $80 per barrel, this contributed to a significant increase in the number of speculative transactions for price increases.

"Today, significant differences in prices in the US market are due to the growth of US shale oil production, the limited capacity of oil pipelines and the distance to export terminals on the Mexican Gulf coast. The volume of American oil production continues to grow, and certain difficulties appear in these conditions. Pipelines are increasingly being exploited to their full capacity, which makes the difference between the price of oil produced in the Permian Basin in West Texas and the prices in the rest of the United States. The price of oil in the main oil export centers on the Mexican Gulf coast, in particular at the Louisiana Offshore Oil Port (LOOP), is much closer to the price of Brent oil, which is an international price benchmark. In fact, a higher target price level for Brent crude, which is a little lower than $82 for barrel was set. This is a partial (61.8 percent) recovery of the price after its fall in 2014-2016."

However, the result depends on the possibility of maintaining the current level of markup for non-basic risk, which ranges from $5 to $10, said Hansen.

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Follow the author on Twitter: @Anvar_Mammadov

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