Oil undervalued as market faces deficit, Iran's supply at risk, analysts warn
SINGAPORE, Nov 27 (Reuters) - Oil prices are undervalued due to a market deficit, with the potential risk to Iran's supply from possible sanctions under U.S. President-elect Donald Trump, according to the heads of commodities research at Goldman Sachs and Morgan Stanley.
"We think that oil prices are about $5 per barrel undervalued relative to the fair value based on the level of inventories," Daan Struyven, co-head of global commodities research at GS told reporters on Wednesday.
The oil market is estimated to be in a deficit of about half-a-million barrels per day over the past year, Struyven said, adding that China and the U.S. are likely to continue restocking strategic reserves for energy security.
He said these factors, along with lower output from OPEC+ producers and a potential tightening of sanctions on Iran that could cut supply by around 1 million barrels per day, could push oil prices higher in the short term.
Brent is projected to peak at about $78 a barrel by next June, before easing to $71 by 2026, as there is significant spare capacity available to address supply shortages whenever needed, Struyven said.
Brent crude futures are trading under $73 a barrel on Wednesday after Israel agreed to a ceasefire deal with Hezbollah while OPEC+ is discussing a delay in unwinding of production cuts.
Martijn Rats, chief commodity strategist at Morgan Stanley, told Reuters last week that oil prices should be a couple of dollars higher as inventories are low.
"We can point at some of this to demand weakness, but there's also been some supply weakness and in many ways this story about this looming surplus, is a story for next year," he said.
While the oil supply surplus is expected to reach 1 million bpd next year, driven by non-OPEC+ output, there is no historical precedent for such a surplus, as producers typically cut output and demand increases when prices drop, Rats noted.
"We're talking about the balance like a year out so, I think the price of oil today is already a little bit over anticipatory of what lies ahead."
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
29 minutes ago
- Reuters
Britain ready to implement US tariff deal, trade minister says
LONDON, June 12 (Reuters) - Britain is ready to implement its side of a tariff deal with the United States and is hopeful for a proclamation from U.S. President Donald Trump to put the agreement into effect in the coming days, trade minister Jonathan Reynolds said on Thursday. British Prime Minister Keir Starmer and Trump on May 8 agreed to reduce tariffs on UK imports of cars and steel to the U.S., with Britain agreeing to lower tariffs on beef and ethanol, but implementation of the deal has been delayed. Reynolds met U.S. Commerce Secretary Howard Lutnick on Tuesday and discussed the implementation of the deal. Asked on Thursday if there would be an update by the end of the week, Reynolds said he was "very hopeful". "We're ready to go, and as soon as the president and the White House are ready to go on their side, we'll implement (our) part of the deal," Reynolds told reporters. Reynolds said he would issue a government order known as a statutory instrument to implement the changes to reciprocal tariffs. Officials said that the update on implementation was likely to come early next week. One of the details to be ironed out before the deal can be implemented is steel quotas. Reynolds added that he wanted to make sure the tariff reductions applied to every bit of the UK steel industry, as the U.S. finalises quotas that will place supply chain requirements on British steel exports to the United States. The bioethanol industry has warned its future is under threat, with Associated British Foods (ABF.L), opens new tab deciding on the fate of a plant later this month. Reynolds acknowledged the deal could increase competition but said the industry was already struggling. "We are very sensitive to the ethanol issue... (but) they're losing a lot of money already," Reynolds said, adding regulatory tweaks could help, but that for financial support: "any intervention I make has to be a clear route to profitability." "So there are much wider issues for these partners than just the U.S. trade deal."
Reuters
29 minutes ago
- Reuters
Trump's tax-cut bill could hold back US critical minerals projects
WASHINGTON, June 12 (Reuters) - U.S. President Donald Trump's tax and spending bill would make it harder for American critical minerals companies to compete with China because it eliminates a tax credit for boosting domestic production of nickel, rare earths and other materials used in advanced electronics and weaponry. With Trump and Republican lawmakers aiming to cut government support for green energy projects, the U.S. House of Representatives passed a version of his "One Big Beautiful Bill Act" last month that eliminates the so-called 45X credit. The Senate is now debating the bill. Former President Joe Biden's 2022 climate change law, the Inflation Reduction Act, created the 10% production credit - a reduction in corporate taxes for critical minerals extraction and processing. The tax break also covers solar, battery and wind projects. The version of the bill that passed the House treats government incentives for wind turbines the same as those for mining projects that many view as crucial for national security. Critical minerals companies now say their projects are collateral damage to the political feud over renewable energy. The tax credit is already law and part of the current federal budget. The nonpartisan Congressional Budget Office, which scores the cost of legislative proposals when asked by Congress, has not studied how much would be saved by removing the credit. The Republican majority in Congress is seeking savings to fund other priorities such as tax cuts, defense and balancing the budget. This month, the hard-right House Freedom Caucus said it "will not accept", opens new tab attempts to "water down, strip out, or walk back the hard-fought spending reductions and IRA Green New Scam rollbacks achieved in this legislation." Miners, though, say they need the credit to compete with China. Beijing has halted exports of some critical minerals, used its control of rare earths to strike a trade agreement with Washington, and flooded global markets with cheap supply of nickel, cobalt and lithium. The traditionally conservative mining industry now finds itself in the unusual position of needing Washington's support to grow and, in some cases, survive. The owner of the only U.S. cobalt mine went bankrupt this year after Chinese miners depressed global prices of that metal. "If we do not have that tax credit, critical minerals producers in the U.S. are at risk of succumbing to closures," said KaLeigh Long, founder and CEO of Westwin Elements, which is building the country's only commercial nickel refinery. Westwin might not be able to service its debt without the tax credit, Long said, noting the company's loans were modeled using the expectation it would be permanent. Last month, Long wrote a letter asking the Senate to keep the credit. It was co-signed by 30 industry executives. Any changes the Senate makes to the bill must be reconciled with the House version before being sent to Trump. Several House members have admitted they did not read the entire bill before voting for it, including Congresswoman Marjorie Taylor Green, a Georgia Republican, and Congressman Mike Flood, a Nebraska Republican. House Democrats unanimously voted against the bill but their criticism has focused on tax cuts they say will widen the deficit while requiring cuts in health care, food assistance, education, scientific research and other programs. "There's so many issues right now under consideration in Congress and this one isn't breaking through, but it will certainly break through when we have a shortage of minerals in five years," said Jeff Green, a critical minerals industry consultant. Senator John Hickenlooper, a Colorado Democrat who voted for the IRA in 2022, said in a statement to Reuters that cutting the credit would "kill jobs ... just to fund tax breaks for the ultra-weathy" and would be a "bad deal" for the country. Trump, who has issued several executive orders aimed at boosting U.S. minerals production, has not commented publicly on the 45x debate. The White House did not respond to requests for comment. "The tax credit just adds a phenomenal bump to a project's economics and gives us advantages that China already gives its own companies," said Alex Grant, CEO of magnesium processing startup Magrathea, who signed the letter. China controls most of the world's production of the metal, used in alloys for steel and aluminum. Abigail Hunter, executive director of SAFE's Center for Critical Minerals Strategy, described the tax credit as the "only tool currently available to support industry exposed to market manipulation." The House version also removes any remaining IRA funding for the U.S. Department of Energy's Loan Programs Office (LPO), which under Biden awarded billions of dollars in loans to Nevada lithium projects from ioneer ( opens new tab and Lithium Americas ( opens new tab. Potential for the LPO's closure led miners to rush to finalize loans last year, as Reuters reported in August. Republican senators this week said they were in discussions about how to extend some green energy tax credits, especially for businesses with large capital investments. No firm commitments have been made. For Mahesh Konduru, CEO of minerals processing startup Momentum Technologies, the credit is one way for Washington to show industry support. "We need to have the appropriate tools to build, nurture and grow that supply chain inside the United States," he said.
The Guardian
37 minutes ago
- The Guardian
Dollar slides to three-year low after Trump repeats tariff threats
The dollar sank to its lowest in more than three years on Thursday as Donald Trump's latest trade threats and the weakening economy appeared to bring forward interest rate cuts by the Federal Reserve. Foreign exchange traders sold the dollar in favour of the yen and the euro, which both climbed by about 1% against the US currency to leave it almost 10% down on its value against a basket of currencies since the beginning of the year. Analysts said there was little appetite to buy dollars at a time when recent data showed the jobs market weakening and while erratic White House policies clouded the outlook for the US economy. The slide came after the US president revived last month's threat to unilaterally impose country-specific tariff rates within the next two weeks. 'We're going to be sending letters out in about a week and a half, two weeks, to countries, telling them what the deal is,' Trump told an event in Washington on Wednesday. Markets were also unsettled by growing speculation that the Federal Reserve would begin to cut the cost of borrowing more quickly than expected after consumer inflation came in lower than expected and producer inflation dropped. Weaker job hiring was another factor after the four-week average number of initial applications for unemployment support rose by 5,000 to 240,250 in May, the highest since August 2023. 'There's clearly solid dollar selling,' said Kit Juckes, the chief foreign exchange strategist at Société Générale. Talks between India and the US over tariffs on steel and aluminium imports imposed by Washington – and the threat of import duties on Indian pharmaceuticals – were also reported to be at loggerheads, leading to speculation that if talks break down, New Delhi may retaliate with tariffs on US imports. Bloomberg reported that India's negotiators had objected to a long list of US demands that included allowing genetically modified crops to be imported and the easing of price controls on medical devices. However, the UK is expected to get a trade boost after Trump indicated that he would put into force the bilateral trade deal signed with Keir Starmer last month, allowing the UK to avoid the extra import duties on cars in return for more relaxed quotas on US beef and ethanol exports to the UK. However, the pound's rise against the dollar to almost $1.36 was choked off by concerns that the UK economy was also suffering more than expected, and that an earlier intervention by the Bank of England to cut interest rates would reduce the demand for sterling. Sign up to First Thing Our US morning briefing breaks down the key stories of the day, telling you what's happening and why it matters after newsletter promotion The UK economy slumped by 0.3% in April, potentially bringing forward the date when the Bank of England cuts interest rates again. Policymakers meet next week, but are not expected to reduce the cost of borrowing from its 4.25% level until August at the earliest. Vasileios Gkionakis, a senior economist at Aviva Investors, said the consistent depreciation of the dollar since Trump's inauguration was probably due to a lack of faith in the US economy under Trump to grow at an exceptional pace, as it had in recent years. He said higher US government debts, which Trump has signalled will escalate once his tax bill passes both houses of Congress, was another deterrent to buying dollars. 'All this is agitating markets, who in order to lend to the US would require a combination of higher [interest rates] and a weaker exchange rate,' he said.
