Oil prices rallied in the first week of 2018, supported by increased geopolitical risk and severely cold weather in the eastern U.S., but the ‘perfect storm’ that pushed oil prices higher also raises the risk of a correction and of heightened herd mentality in trade, analysts reckon.
Protests in Iran, possible new U.S. sanctions against Tehran, and Venezuela’s economic collapse could be the main geopolitical risks that could drive oil prices up early this year. Oil prices made their strongest start to a year in four years, with both Brent and WTI started trading in 2018 above $60 a barrel for the first time since January 2014.
Joe McMonigle, a senior energy analyst at Hedgeye Risk Management, told UPI that there could be some “geopolitical lottery tickets” this year, especially if U.S. President Donald Trump refuses to waive the sanctions against Iran later this month.
“Gauging the probability of an oil supply disruption, calculating the likely magnitude and assigning it a premium is always tricky,” Vandana Hari, a market analyst and founder of Vanda Insights, told UPI via email.
“It makes for knee-jerk reactions in the oil market, upswings and corrections, as well as a more pronounced herd behavior in trade,” Hari noted.
“Brent’s spectacular vault over $68/barrel this week, with WTI managing to breach the $62 mark, prompted a chorus of calls for a price correction,” Vanda Insights said in its weekly newsletter on Friday.
“The question is, what might be a trigger and how sharp a fall will it be. We see a strong case for the correction to be a gradual cascading than a sudden downshift because of the numerous geopolitical factors at play. These are slow to pan out and not easy to rationalize or discount,” the energy markets intelligence firm said.
Meanwhile, hedge funds increased last week their net long positions in Brent by 4 million barrels to a new record of 565 million barrels, Reuters market analyst John Kemp writes. Net long positions in WTI dropped by 6 million barrels to 455 million barrels in the week to January 2—down from a record 461 million barrels the week before. Money managers boosted their net longs in heating oil and diesel fuel to records, as middle distillates in the U.S. are below the seasonal average, and the extreme cold in the eastern U.S. is further expected to tighten middle distillate supplies.
By Tsvetana Paraskova for Oilprice.com
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