Supply risks still loom large for crude oil: Julius Baer

Crude oil supply risks still loom large in the near term as the upcoming Iran embargo leaves the oil market with only a small buffer to absorb additional shocks, Julius Baer noted in a recent report.

Venezuela and Libya are the key wild cards, and any negative surprise would leave the oil market in short supply, the report added.

The price risks remain skewed to the upside. But heading into next year, the oil market’s supply cushion should be restored, and upside risks should disappear, the report said.

Noting that oil could not escape the broader downdraught on financial markets and continued to slide last week, Julius Baer report said growth concerns for oil are building.

The November 4 deadline is approaching fast, and, to avoid punishing measures by the US ad-ministration, countries and companies must reduce imports of Iranian oil towards zero by the end of the week.

Consequently, Julius Baer report said, most buyers began significantly reducing their Iranian oil purchases in the autumn, considering that oil tankers are in transit on sea for some weeks.

“Earlier supply fears have eased, not the least because petro-nations, including Saudi Arabia and Russia, raised production, which put pressure on oil prices. Swelling oil inventory levels in the United States tamed the supply fears as well,” it said.

Petro-nation output remains elevated, the shale boom is gradually adding supplies, and oil demand growth in emerging markets is slowing, as soft currencies turn today’s elevated oil prices into an economic challenge, Julius Baer’s team of economists and analysts noted.

The report however said the Iran embargo’s fundamental impact largely depends on China and India, which together buy more than half of Iran’s oil exports.

“Irrespective of possible concessions by the US administration, when oil prices are high, both have limited economic interest to fully comply with US demands,” it added.

In brief, it said, two negative feedback loops make any oil price rally short-lived: high prices burden demand growth and weaken compliance with the Iran embargo.