Economic expert and International Business Editor of The Daily Telegraph Ambrose Evans-Pritchard said Thursday that President Donald Trump’s desire to “drive every last barrel of Iranian crude oil off the market” has a 50 percent chance of driving oil prices to $120 a barrel by early 2019.
> A spike in Brent oil to $US120 by early next year would probably be enough to tip the eurozone and Japan into recession, and would be the coup de grace for large parts of the emerging market nexus.
> It would amplify the effects of monetary tightening by the US Federal Reserve and the European Central Bank already in the pipeline, and which will hit with full force in the first quarter of 2019.
> The likelihood of such an oil spike has risen from implausible to near 50:50 as it becomes clear that the Trump administration really does intend to knock out 2 million barrels a day (b/d) of Iranian exports by early next year. Those barrels are the difference between ample world supply and an almighty crunch.
The spare capacity of global oil producers is likely to fall below 1 percent, Evans-Pritchard said, which would mark the first time in post-war history such a situation has occurred:
> This is lower than during the Opec shock of 1979, and lower than in July 2008 when Chinese demand pushed Brent to $US147 a barrel.
> "All this works perfectly so long as there are no supply problems anywhere. But Libya and Nigeria are political wild cards, and Venezuela is collapsing," said Helima Croft from RBC Capital Markets.
> "You have already had three Saudi tankers attacked in the Red Sea by (Iranian-backed) Houthis and one was sunk. You can't rule anything out," said Mrs Croft, a former Mid-East analyst for the US Central Intelligence Agency.
> Jean-Louis Le Mee and Will Smith, from Westbeck Energy, said Saudi Arabia, Opec, and Russia cannot lift output much further to plug the Iranian deficit even if they bend every sinew. "Every producer globally is currently squeezing every last barrel," they said. Westbeck is betting on a "furious rally" in November and December, culminating in a $US150 crescendo next year.
An already strained system will be unable to handle the added stress, and the consequences could be devastating:
> The energy intensity of the world economy has halved since the Opec crises of the Seventies. Yet oil can still cause havoc. The spike of July 2008 was a deflationary shock of the first order. It drained demand from the US, European, and East Asian economies, and triggered the collapse of an over-leveraged financial system that had become dangerously unstable.
> The system is scarcely safer today.