As oil prices rallied on Wednesday, one commodities expert said markets had been focused on a weaker outlook for demand versus the possibility of supply disruptions.
Bloomberg News reported Wednesday that oil prices rose to a one-month high after Israel said it would retaliate against Iran after the nation fired a barrage of around 200 ballistic missiles, which increased potential risks to the supply of crude oil in the region. West Texas Intermediate (WTI) prices rose about two per cent to around US$71 per barrel late morning Wednesday.
“It is a reminder that the world, particularly the Middle East, is still very unstable and we have to think about the possibility of supply disruption,” Randy Ollenberger, the managing director of oil and gas equity research at BMO Capital Markets, said in an interview with BNN Bloomberg Wednesday.
“The market had been entirely focused on the weak demand narrative. We’re now starting to see a little bit of fear creep into the market about what if some of that supply is not there.”
In order for the rally to continue, he said either supply disruptions need to occur or there needs to be “some evidence” that demand for oil is beginning to improve. Ollenberger added that oil prices could go “materially higher” if some kind of supply disruption were to occur, or at least “the threat of a material supply disruption.”
On the demand side, he pointed to hopes that fiscal stimulus in China, coupled with interest rate cuts from the U.S. Federal Reserve could stimulate demand in both countries, which “could start to send oil in the right direction.”
“If the fiscal stimulus that they’ve recently put into place starts to work, we could see higher demand. What we’ve seen is weakness in Chinese manufacturing demand and industrial demand, and that has hit the diesel market in particular,” Ollenberger said.
“So, if we start to see some stronger demand growth in those sectors, I think that that could start pushing oil prices higher as well,”
He highlighted that recently, investors had broadly been focusing on more defensive companies within the energy sector.
“I think now what you’re seeing is those investors rethinking that and increasing exposure to some of the stocks that might have a little bit more torque to the upside if oil prices were to continue to rally,” Ollenberger said.