Intraday oil futures prices were "stuck" between $75-80/bbl for the previous 10 trading days, Paul Horsnell at Barclays Capital, London, reported July 28.
"Oil prices are perhaps not quite as stuck as US natural gas prices, with the August contract now having traded at $4.60[/MMbtu] at some point on 8 of the past 9 trading days, but they are nonetheless pretty stuck," Horsnell said.
Value of the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was at $71.50-74.50/bbl for 14 trading days, "and in euro terms the range over the past 5 days has been very narrow, from €57.09 to €57.66/bbl," Horsnell said.
"In other words, at least in terms of price dynamics July has not, on the surface, been the most exciting month. The battle between pessimistic macroeconomic sentiment and upside surprises in global oil data has for the moment fought itself to a standstill," Horsnell said.
Such a battle can never become a draw as the two opposing positions cannot coexist into the medium run. "But at the moment it does look like the phase during an arm-wrestling contest when not much is happening visibly, regardless of the power being expended," said Horsnell.
Prices have drifted upward in recent weeks, with $75/bbl representing a "short-term" floor and $70/bbl "still looking like the rock-bottom source of fundamental support on the downside in the worst of possible economic worlds."
Horsnell said, "In our view, $80[/bbl] is not likely to hold for too long as an upside barrier. A range of $5/bbl is too narrow to contain intraday movements for any extended period, and current global data flow appears strong enough to us to support a look at the upside, rather than a breakdown below $75 towards that absolute distress floor at $70."
Geopolitical factors
Geopolitical developments haven't influenced oil prices much in recent months. "The key issues, particularly in the Middle East, have all been on very slow fuses, and developments had become relatively ossified for a while. There have been, however, some signs of movement and realignment in several issues in recent weeks," Horsnell said.
"First, the Russian position has shifted to the extent that a further deepening of the concordance between Moscow and Washington on the [Iranian nuclear] issue has started to look far more feasible. Second, with a new National Intelligence Estimate on Iran due soon, the intelligence evaluation in the US appears to be moving closer to that held in Europe and elsewhere," Horsnell said.
As a result, he said, there is a "probability" the US may face "a stark decision" in 2011 between containment of and direct action against Iran if the latest sanctions are not successful.
"The Iranian nuclear issue has been bubbling away on the backburner for almost a decade now, occasionally coming to the attention of the market before fading into the background again. It has, however, never fully gone away, and we do expect it to garner a significantly greater share of market headlines over the next 18 months than it has over the past 18 months," Horsnell said.
Meanwhile, earlier signs of a limited detente between Israel and Syria "have been washed away completely" while tension between Lebanese civilians and UN peacekeepers has escalated sharply "and the fusion of Lebanese issues within the wider regional context, including Iran, does seem to make the situation something of a potential tinderbox," he said.
Escalated rhetoric on both sides and increased mutterings "about the observation of UN resolution 1701 in particular," he said, suggest a potential flashpoint. "That flashpoint could well cause a certain amount of uncertainty for the oil market about potential escalation as the situation evolved," Horsnell said. He sees "a link between the Iranian issue and other regional tensions, in that escalations of the situation seem just as likely, if not more likely, to involve conflicts by proxy rather than direct confrontations, adding to the dangers of the current Lebanese situation."
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