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Oil price surges in response to global tensions

‘From a long-term perspective you certainly don’t want to buy oil at current levels … and fossil fuel is in declining territory’: AvaTrade chief market analyst Naeem Aslam.

FIFI PETERS: It was a big day for Opec members today who comprise the biggest producers and exporters of oil. They held their virtual meeting earlier today. I can tell you that [with their] going into that meeting many analysts didn’t expect much reaction to the current oil price, which reached $113/barrel earlier. This is a fresh seven-year high. The meeting must have been pretty awkward, just given the members at that table, members who included Russia’s Deputy Prime Minister Alexander Novak, who sits on the Opec Plus board as the co-chair.

We’ve Naeem Aslam, the chief market analyst at AvaTrade, to tell us everything we need to know about an oil price right now that seems to be running out of control. Naeem, with Opec deciding to stick to its target of bringing only 400 000 barrels a day onto the market – are you surprised by that outcome, and do you think it was the right thing for them to do?

NAEEM ASLAM: Thanks for having me, as always. Look, I think given where the oil prices are, this is absolutely not the right strategy. But Opec members have been very much vocal. They’re comfortable with where the oil prices are, they’re in no rush to reduce those prices or to increase supply manically. Given where the prices are, I think the market is really crying out for more supply. There are concerns and qualms around some sort of attention coming on Russian oil. Where we see it and what we see is that traders are already avoiding Russian oil, and hence that is represented in terms of a tightness in the spread between Brent and crude.

FIFI PETERS: When you say that in terms of some people some countries are already avoiding Russian oil, I’ve read a report that the current sanctions on Russia’s banking system have impacted around 70% of Russia’s oil exports. So if we say that that is true, then are you saying that, should sanctions actually be placed directly on Russian oil, and we are not really going to see much of a movement in the Brent crude price because at these levels it has currently priced that in?

NAEEM ASLAM: No, absolutely not. I don’t think it is priced in at all yet, because Russia is a major player in the oil market. If we do see sanctions coming on Russian oil, where we’ll see oil shooting is all the way to $150.

FIFI PETERS: Hmm. That’s the worst-case scenario, I think. What’s the best-case scenario as we look at Brent crude presently at $110/a barrel?

NAEEM ASLAM: The best-case scenario would be having a deal with Iran and bringing supply and the spare capacity from the Iranian side on the market. That would to me ease the pressure in terms of prices and where the oil prices are; so with that supply coming on the market it sort of mitigates some sort of arrest from the Russian side.

FIFI PETERS: I also heard that description describing Saudi Arabia as the ‘central bank of oil produces and exporters’, just given the significance of a move by Saudi Arabia, bringing more oil to the market and the move that that could have on taming the increase in oil prices right now. Do you foresee Saudi Arabia playing that role?

NAEEM ASLAM: The Saudis have made their position very clear with respect to your path. None of the Opec members really want to increase the supply. They don’t see any threat from the ongoing war, Russia and Ukraine. They’re comfortable in relation to the supply. That was pretty much the message today in the meeting, as well, and hence we’ve seen only a very gradual increase in supply.

But if you want me to look at this particular picture from a long-term perspective, and if you are in this field, in the energy sector, from a long-term perspective you certainly don’t want to buy oil at current levels because oil prices at current levels are way above their normal levels, and fossil fuel is in a declining territory. What I mean by that is it’s more about renewable energy and we see more activity from that side.

So personally I’m not a buyer of oil at these particular levels. Am I shorting, would I like to short at the current levels? Given the ongoing situation with Russia, I think there’s a potential for oil prices to continue to rise from here onward. So anywhere between $125 to $130/barrel could be a good opportunity to short.

FIFI PETERS: Okay. Naeem, thanks so much for your time. We’ll leave it there. Naeem Aslam is chief market analyst at AvaTrade.

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