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Saudis look to assuage jittery oil market as analysts look to $100-bbl by 2020

Crude oil prices tumbled Oct. 23 as Saudi Arabia said it will step to the plate and provide spare capacity to meet growing world oil demand as U.S. Sanctions against Iran are set to begin.

Brent front-month futures on the New York Mercantile Exchange settled Oct. 23 at a near two-month low of $76.44 per barrel after reaching a near four-year high of $86.29/bbl on Oct. 3. West Texas Intermediate oil futures settled Oct. 23 at $66.43/bbl, down from a peak close of $76.41/bbl on Oct. 3.

Prices had been driven higher by concerns that Saudi Arabia would use its oil as a strategic tool and withhold spare capacity in order to maintain its influence on the market or on the global political stage.

However, in a move seen as an attempt to appease the market following the assassination of Washington Post journalist Jamal Khashoggi, Saudi Arabia said it will bring its spare capacity to market, Price Group analyst Phil Flynn said in an Oct. 24 note.

"Oil prices got slammed as Saudi Arabia oil minister Khalid Al-Falih suggested that not only will Saudi Arabia step up to 'meet any demand that materializes to ensure customers are satisfied' but all other producers should be doing the same," Flynn said. "So, in other words, for the first time since the historic OPEC-Non-OPEC agreement went into effect in January of 2017, the Saudi oil minister is saying that there is no OPEC oil quota."

The world's oil supply has tightened due to, among other things, political unrest and a lack of investment in Venezuela. In this tighter market, crude oil prices could surge without a commitment from Saudi Arabia and other OPEC members to bring more capacity to market.

Unleashing capacity however, could spur demand growth as oil prices tumble and drive fresh support into the market, analysts said.

Demand growth had slowed as higher prices moderated consumption, Flynn said. "Now we will get a demand surge if the world does not fall into a recession."

HSBC in a recent note said Brent crude oil price could climb to $100 per barrel by 2020. The bank raised its long-term Brent forecast for the first time in 15 months to $80/bbl for 2019, up from its previous estimate of $70/bbl.

In its Oct. 18 global oil supply and demand outlook, analysts with McKinsey said they see Brent prices balanced around $65/bbl to $70/bbl until 2022, but cautioned that sustained, large output disruptions threaten to send the market higher.

Raymond James analysts raised their outlooks for Brent prices to an average of $105/bbl in the first quarter of 2020, while the analysts said WTI crude oil prices are likely to reach $85/bbl in the fourth quarter of 2019 and $95/bbl in the first quarter of 2020.

"The bottom line is get ready for triple digit oil prices in the next few years," the Raymond James analysts led by John Freeman wrote in an Oct. 23 report. "We now believe that oil prices over the next two years must increase to levels that are high enough to materially slow down global demand growth."

As Saudi Arabia raises production and other producers follow suit, the world's spare oil production capacity will be erased, Flynn said. "So, we are going to find out how the global oil market is going to react to events with no oil in the bullpen."

"Buckle up for an oil price spike," Flynn said.