An OPEC sign hangs outside the OPEC Secretariat ahead of the 173rd Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna. (Photographer: Akos Stiller/Bloomberg)

Crude Could Reach $80 Amid Supply Shock Concerns, Says Jonathan Barratt

Crude prices will continue to trade strong and could reach $70-80 a barrel by the end of the first quarter of 2018, said Jonathan Barratt of Ayers Alliance, amid concerns over a supply shock in the oil market.

Apart from continuing geopolitical issues in the major oil producing countries such as Venezuela, Saudi Arabia, Iraq and Libiya, global strategic petroleum reserves have been contracting “dramatically”, Barratt said. That has left no buffer in case there is a supply shock, which could push crude prices higher in the coming months, he said.

The problem that I do find is that if there is a supply shock from now to say June, there is no mechanism in place to be able to address it.
Jonathan Barratt, Chief Investment Officer, Ayer Alliance

Yesterday, OPEC and its allies including Russia agreed to extend their campaign to win back the control of the oil market from America's shale industry. The oil production cut deal was further buffed up through the inclusion if Nigeria and Libya that were originally exempted from curbs.

Will crude prices hit the $100 mark in the next six months? Barratt said the possibility could not be ruled out.

Here’s the full conversation.

What does the extension of the oil ouput cuts mean for prices from here on?

We will see the cuts continue for another 12 months. You can expect the crude prices to be very strong... Crude prices at this levels, given any formal supply shock or economic demand, we’ll rise.

Do you think the OPEC members will abide by the decision?

They have abided by the decision before and their compliance has played well over a 100 percent. The interesting thing is the exits, particularly which Russia is looking for. This means to be able to exit the supply caps, if effective, then it’s a shock which comes to the market. One of the concerns we hold is that everyone will be compliant because everyone will benefit from it. The problem that I do find is that if there is a supply shock from now to say June, there is no mechanism in place to be able to address it.

What is your near-, medium-, and long-term crude price outlook?

It is the environment. On the flip side, we see the market settles but later in 2018, I am quite positive that it will tend to trade higher. I still see good economic demand, geopolitical issues that haven’t been addressed, sure I see the U.S. producing more shale oil. Given where we are with all the players, crude prices will trade higher. Comparing to the moment, I say the crude will trade $70 per barrel.

$70 per barrel by when?

I will be looking around the first quarter or maybe in the second quarter (of 2018).

Is $100 per barrel a possibility?

Yes, it is. That’s something we have talked about in terms of supply shocks. We are looking at Venezuela, changes in Saudi Arabia, Turkey, problems in Iraq and Libyan issues. Apart from the geopolitical issues, we have global strategic petroleum reserves contracting dramatically. We don’t have that buffer if we do get a supply shock. So, if there is a supply shock, we won’t be able to supply in the short term. Hence, there is real concern that supply shocks will push up prices in the U.S. to $75-80 or a little bit more, but it will only be a temporary thing.