A bearish outlook for oil prices

Oil prices have risen to near-four-month highs around $115 a barrel in the past few weeks. Hopes of a boost to the global economy through further central bank money printing are one reason. Potential supply disruptions in the Middle East have also bolstered prices.

Yet fears over supplies look overdone, says Capital Economics. The main worry is that a strike on Iran could close the Strait of Hormuz, through which a fifth of the world’s oil supply is shipped. But a recent speech by Israel’s prime minister Benjamin Netanyahu implies that any action will be on hold until the middle of next year.

Meanwhile, the hard-hitting sanctions against Iran suggest it could well agree to concessions on its nuclear programme, making an attack less likely. Even if there is a strike, the Strait probably wouldn’t stay closed for long as the West could deploy “overwhelming force” to open it, adds Capital Economics. It could also offset the effect of the closure by releasing emergency oil reserves onto the market.

Beyond geopolitics, the demand-supply fundamentals are bearish, says Citi Futures. US crude production has hit a 15-year high, while extra production from Russia, Iraq and Saudi Arabia has compensated for most of the decrease in Iranian supply caused by the sanctions. Opec production, moreover, is close to levels last seen in 2008, when growth was strong. Demand, on the other hand, is set to decline as global growth forecasts are being trimmed. Given all this, prices look more likely to fall than rise from here.

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