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APPEC: Oil could top $100/b as market risks intensify: traders

Singapore — Crude prices could rise above $100/b as market uncertainties stack up including sanctions on Iran, Venezuelan production concerns, tighter crude inventories and Saudi spare capacity, oil traders said at the S&P Global Platts Asia Pacific Petroleum Conference in Singapore.

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"I think we may well be on the verge of some very significant volatility here in Q4 2018 because, depending on the severity and the duration of the Iranian sanctions, the market simply does not have an adequate supply response for 2 million b/d of oil disappearing from the market," Daniel Jaeggi, president and co-founder of Mercuria Energy Trading, told the conference Monday.

"It is conceivable to see oil north of $100/b," Jaeggi said.

The US sanctions on Iran threaten to cut Iran's crude exports to as little as 1 million-1.3 million b/d from over 2.5 million b/d, according to Trafigura.

Other market participants have projected an even more severe reduction in Iran's exports after US sanctions take full effect on November 5.

"We have a rather unfortunate time in the election cycle in the US in early November which we need to get beyond that will be creating some noise," Ben Luckock, co-head of oil trading at Trafigura, said.

"I think it is entirely possible that once are beyond that we trade higher into Christmas and higher again into the New Year. We are at $80 today. I think it is entirely plausible that you are at $90 by Christmas and you are probably going to trade $100 in the New Year," Luckock said.

GROWING MARKET UNCERTAINTY

The plethora of uncertainties gathering around oil markets, some of which have been accumulating for months, extends beyond the end of 2018.

Luckock said Trafigura has had an unpopular view that "lower [prices] for longer" was over, and the market was now further along the underinvestment cycle that has tightened supply and demand.

"It is really how high does it go. W what does it mean and when does it happen?" he said. "If we continue on the pathway that we are at the moment, I think that oil prices are going to trade higher."

Broader economic concerns also threatened fundamental demand for crude oil, especially with recent concerns over emerging market growth and an impending recession.

"What concerns me more is the political risk that we are seeing out there today that was not so significant in the past," Bill Bolton, CFO of Integrated Supply & Trading, Eastern Hemisphere, BP, said.

"We are seeing more risks around trade sanctions, risks around trade wars and we have Mr Trump's tweets which cause the market to gyrate at times," he said.

Bolton said financial market risks included the eruption of the shadow banking industry, which was a major concern from a credit perspective, and upcoming risks include MARPOL's low sulfur cap for shipping and the recent drawdown in crude stocks.

He said those types of risks were manageable but political risks "are the risks that are harder to manage and I think we need to be ready for those risks to run one way or other at any point in time."

SAUDI SPARE CAPACITY

A key reason cited for the tightness in the current market was OPEC's spare capacity, primarily controlled by Saudi Arabia.

"You have to remember that you have a relatively small buffer and they are controlling most of it. But they need to be extremely judicious about how they use it," Luckock said, adding that in the event of a supply disruption the very thin buffer was controlled by one organization.

"How they then use that is clearly going to have a price impact," Luckock said. "It is part of why we have this bullish view. We do not really have that much spare capacity left."

Oil traders were largely in agreement that geopolitical premium in oil includes thin spare capacity.

"The oil price has to reflect risks going forward," Giovanni Serio, Global Head of Research at Vitol, said.

Serio said the more Saudi producers tried to meet the supply disruption, the more nervous the market was going to be about their ability to meet future potential supply disruption.

"Inevitably as the market gets into a situation where it sees OPEC or the Saudis hit record production levels and test the real capacity, there should be a real premium in the market based on risks going forward," Serio said.

-- Eric Yep, eric.yep@spglobal.com

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Edited by Daniel Lalor, newsdesk@spglobal.com