Energy

Oil bulls beware: Saudis can keep crude anchored near $70, Barclays says

Key Points
  • Barclays forecasts the price of Brent crude oil will average about $73 a barrel over the next six months, lower than the cost today.
  • More bullish forecasts underestimate the amount of oil Saudi Arabia and its allies can add to the market to offset output and export declines elsewhere, the bank says.
  • The Saudis are likely to heed President Donald Trump's calls to tamp down gasoline prices, including by shipping more oil to the United States to replenish stockpiles.
Khalid Bin Abdulaziz Al-Falih, Saudi Arabia's energy minister and president of OPEC, speaks as Alexander Novak, Russia's energy minister, left, listens during a news conference following the 172nd Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Thursday, May 25, 2017.
Akos Stiller | Bloomberg | Getty Images

Oil prices will back away from $80 a barrel over the next six months as Saudi Arabia and its allies add more supplies to the market, Barclays said in a research note on Tuesday.

The bank said the more bullish outlook held by some of its peers "rests on shaky ground," and the market is underestimating the Saudis' ability to manage the market. Saudi Arabia — along with Russia, Kuwait and the United Arab Emirates — has vowed to meet global oil demand as U.S. sanctions cut off Iranian exports later this year and Venezuela's output continues to decline.

Brent crude has traded between about $77 and $79.50 this month, but Barclays forecasts it will average $73 a barrel in the second half of 2018. That's up $3 a barrel from its last forecast, due to the looming U.S. sanctions on Iran and recent supply disruptions in Libya, but Barclays said it doesn't see as much upside for oil as other banks.

Morgan Stanley recently raised its six-month outlook for Brent to $85 a barrel after the Trump administration took a more hawkish stance on cutting off Iran's oil exports. Goldman Sachs warned last month that prices could overshoot its call that Brent will peak at $82.50 this summer.

Oil prices edge higher as crude inventories fall to lowest level in three years
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Oil prices edge higher as crude inventories fall to lowest level in three years

OPEC, Russia and several other producers recently agreed to increase output by 1 million barrels in order to ease oil prices away from 3½-year highs. But many analysts think they will struggle to add that much supply because only a handful of the countries have spare capacity.

However, Barclays said the market is underestimating the spare capacity that Saudi Arabia, Russia, Kuwait and UAE can tap. A recent estimate by the U.S. Energy Information Administration could be overlooking 1.5 million barrels a day of spare capacity, Barclays said.

Oil bulls also tend to assume that Saudi Arabia and Russia are trying to guide crude prices to $80 a barrel, a view fueled by news reports earlier this year. However, Barclays said President Donald Trump's recent Twitter demands for OPEC to tamp down gasoline prices will resonate with the Saudis, who enjoy friendly ties with his administration.

"The Saudis also do not want to disappoint US policymakers nor lose its credibility," wrote Michael Cohen, head of energy markets research at Barclays. "In our view, Trump has made clear in his tweets that he is not happy with higher oil prices, which is part of a long history of targeting OPEC."

Saudi Arabia is likely to start exporting more oil to the United States, which would replenish American stockpiles, Barclays said. The United States has some of the most transparent and closely watched inventory data in the world. A jump in U.S. stockpiles can dampen fears of undersupply and guide prices lower.

Governments around the world could also tap their strategic oil reserves, Barclays said. While oil stockpiles held by companies have fallen to their five-year average at 2.8 billion barrels, governments in developed countries keep another 1.8 billion barrels in reserve for emergencies, according to the bank.

Barclays added the Trump administration could give China and India more time to reduce their purchases of Iranian oil. The State Department recently said it is pushing oil buyers to cut those purchases to zero, but the administration might back off that demand if gasoline prices rise ahead of midterm elections in November, it said.