Oil price rally suggests $100 target

Oil closed over $73 per barrel last week and was flirting with the $74 price level in what marks the highest price since early July. The tension between falling Iranian oil exports and the degree to which Saudi Arabia and its partners (OPEC+) may increase output is sure to occupy the market’s attention over the next few weeks.

The state of the oil market was a hot topic at the Asia Pacific Petroleum Conference in Singapore last week, where analysts remained incredibly bullish on oil prices. Saudi Arabia recently said that it was comfortable with oil at $80 per barrel, signaling that the Kingdom may be slow to replace lost Iranian oil barrels. OPEC+ decided against immediate production increases at a meeting in Algeria last weekend, although Saudi Arabia indicated that it might increase production in September and October. Saudi Arabia is worried about creating a new supply glut on the back of expectations of a seasonal demand dip this winter.

The breakout in Brent crude prices has prompted analysts at the sell side banks to start talking about a return to $100 a barrel oil.

Investors have indicated they see prices rising, loading up on options that give the holder the right to buy Brent crude at $90 a barrel by the end of October. Open interest in call options at $90 a barrel has risen by nearly 12,000 lots in the last week to 38,000 lots, or 38 million barrels.

Higher oil prices and dollar strength, which has battered the currencies of several big crude importers, could hit demand growth next year, analysts said.

But, for now, the focus is on U.S. sanctions on Iran’s energy industry that will apply from Nov. 4 and are designed to cut crude exports from the third biggest producer in the Organization of the Petroleum Exporting Countries.

Several major buyers in India and China have signaled they will cut purchases of Iranian oil.

“If Chinese refiners do comply with U.S. sanctions more fully than expected, then the market balance is likely to tighten even more aggressively,” Edward Bell, commodity analyst at Emirates NBD bank wrote in a note.

U.S. President Donald Trump spoke to Saudi King Salman on Saturday on ways to maintain sufficient supply.