Oil Prices – Risk-off Rules, But For How Long?

The correlation between Brent and the S & P 500 Index has been exceptionally strong through October, coming in at 0.96. The rout in equity markets has fed perfectly into market fears of a significant slowdown in oil consumption next year. Iran, the key bullish driver this year, has lost its impetus, removing crucial price support; the lack of clarification between Iranian oil exports and oil sales has resulted in market complacency about the true level of the reduction. For example, an increasing percentage of exports to China have landed in Dalian, where Iran holds bonded storage capacity, and therefore should not be viewed any differently to Iranian floating storage. Sanctions on the sales and purchase of Iranian oil will be re-imposed on November 5th. The administration has announced limited waivers will be granted to eight countries. Our view is that Iranian exports will average 1.3mn b/d by year-end, compared to 2.5mn b/d average between January and April 2018. The issuance of waivers and higher OPEC+ production will blunt the full market impact of the sanctions, preventing a spike to the $90-100/bbl range that was widely touted just one month ago . It would however be incorrect to assume that the loss of an average of 1.2mn b/d of oil will provide no upwards pressure on prices, despite the rise from OPEC+, given the spare capacity exhaustion required to mitigate the loss. Once the volume of export loss digested by the market and equity markets stabilise, we expect Brent to appreciate back towards our quarterly target of $81/bbl