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The escalating trade war between the United States and China threatens global growth. The physical markets are already showing signs of strain as unwanted crude builds on ships and crushes prices for cargoes of oil.
Aside from that, interest rates around the world are rising and the dollar is strengthening, which means emerging market oil buyers are seeing their import bill growing almost daily.
Both OPEC and the International Energy Agency have warned about the risk of trade disputes to global demand growth in their most recent monthly market outlooks.
Despite all this, prominent hedge funds such as Andurand Capital and Westbeck Capital are betting oil could skyrocket to $ 150 a barrel from around $ 75 now.
The main driver is expected to be upcoming U.S. sanctions on Iran’s energy sector, which start in November.
“Our view is that by November 4, we will have lost between 1.3 and 1.4 million barrels (of output) a day. It is a very big number. That’s based on the view that the U.S. will allow a few temporary exception waivers .... Ultimately, we could see losses from Iran exceed 2 million barrels a day,” Jean-Louis Le Mee, chief executive officer of London-based Westbeck, said.
U.S. President Donald Trump in May walked away from a 2015 nuclear deal between world powers and Tehran that he said was one-sided in Iran’s favor.
Pierre Andurand, who runs the $ 1.2-billion Andurand Commodities Fund and predicted the rise and subsequent crash in the oil price in 2008, responded on Twitter by pointing out OPEC’s spare capacity was at its lowest ever. “There is going to be a real issue,” he wrote, predicting prices above $ 150 per barrel within two years.
“We don’t sense a great deal of engagement yet from generalist investors. A few of them are starting to look at it now,” Will Smith, Westbeck chief investment officer said.
“This is going to catch everybody by surprise. Some of the specialists are bullish – including Pierre (Andurand), ourselves and Energy Aspects,” he said.
Aside from the risk to Iranian supply, Venezuela’s crude production, which has already collapsed as a result of economic crisis, could fall below 1 million barrels per day (bpd) by the end of the year, compared with 2 million bpd in mid-2017, Smith said.
A month ago, the amount of open interest in calls maturing in this time period outnumbered that of puts by nearly three to one. This ratio is now down to two to one.
“If we are right about oil going from $ 75 to $ 150 over the next 12 to 18 months, out-of-the-money oil options, further down the curve ... look very exciting. The pay back there is just fantastic if we are right,” Westbeck’s Smith said.
Washington's call on countries to stop oil imports from Iran have been met with opposition from major Iranian crude buyers such as China and India.
On the heel of resumption of US sanctions, India's oil imports from Iran in July hit a record high of 768,000 bpd, registering a 30 percent rise compared with a month before.
China's average oil imports from Iran from January to May have been estimated at 718,000 bpd, showing a 10 percent rise compared with the corresponding period the previous year.
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