With US sanctions against Iran set to take effect on November 5, the market has been awhirl with speculation about how that could affect Iran's oil production. But Ole Hansen, head of commodity strategy at Saxo Bank, says there are wider market considerations being taken into account.
"Right now it seems like we have a tug of war between those worried about the price impact of US sanctions against Iran, and those who are looking further out who have seen the recent weakness in the stock market, rising bond yields and basically some clouds on the horizon in terms of global growth and therefore global demand," Hansen said in a telephone interview. "We’ve seen hedge funds sell into [the oil price] rally rather than buy into them, that indicates macro funds are worried about developments."
He notes the strong dollar, rising debt and rising cost of servicing debt as key issues. But sanctions against Iran are a short-term cause for oil price fluctuation.
"Global oil traders and banks are all over the board on oil price towards year end," Hansen said. "I’ve seen anywhere between $70 and $100 and that just reflects the uncertainty."
Hansen said it is difficult to see where oil prices are going without knowing how strongly Iran's oil production will be impacted by sanctions. "Is Iran going to lose 2mn barrels [per day] of production? Then there’s no reason why we couldn’t seen a short term spike up to the $90 level or higher. If it manages to maintain production and only sees cuts of around 1mn barrels, then we’re looking at a price of around $80 by year end," he said.
But there are non-OPEC players in the market, too, including the US itself. Bottlenecks currently impacting US production in the Permian basin are expected to be resolved next year, so there could be a boost in North American oil production.
"Right now the market is on the defensive because the outside markets are providing some uncertainty about the future outlook," he said. "The market will always tend to run ahead of itself. When the market sees issues down the line it reacts to it now. [That is] normal market psychology. If there are grey clouds on the horizon they will react today."
Listen to his analysis, and more comments on the oil price, below.