Expect Higher Oil Prices

This from Bloomberg:

Oil prices could rally to $100 a barrel next year, a level not seen since 2014, as supply risks in Venezuela and Iran strain global markets, according to Bank of America Corp.

Oil at US$100 a barrel by next year?

It could very well happen.

Brent crude oil futures are trading at about US$77 at time of writing. It has increased over 16% since the beginning of the year and over 3% in the last couple of days.

On Wednesday, the US pulled out of the Joint Comprehensive Plan of Action (JCPA), or the Iran deal as it is also known.

The Iran deal is an agreement made in July 2015 between China, France, Russia, the UK, the US, Germany and the European Union (EU) with…yep you guessed it, Iran.

The deal removed sanctions that had damaged and isolated Iran’s economy. In exchange, Iran stopped its efforts to develop nuclear weapons capability.

By withdrawing from the deal, US President Donald Trump is looking to renew sanctions on Iran. It could also penalise any business from anywhere in the world that keeps trading with Iran by excluding them from the US dollar global system.

Is this a way to get North Korea nervous before their meeting with Trump? Who knows.

Whatever the case, China and the EU are desperately trying to save the agreement.

It’s not surprising. Most of Iran’s oil exports go to China and the EU. Cutting off their access to Iran would affect both countries.

Trump has said it is looking to make a new deal with Iran that would also include their missile program.

But while Iran has said it still has a deal with five other nations, they are not holding their breath for a new deal with the US.

As reported by News.com.au the Iranian President Hassan Rouhani said:

I have instructed the Iranian Atomic Energy Organisation to take the necessary measures for future actions so that if necessary we can resume industrial enrichment without limit.

Meanwhile, there are Israeli air strikes going on against Iranian targets in Syria…

…and the US is looking to open their US Embassy in the disputed city of Jerusalem this Monday.

That is, expect that there will be more turmoil in the Middle East. 

Adding to the problem is the squabble between the Organization of Petroleum Exporting Countries (OPEC) and the US shale oil — an alternative to petroleum — producers.

Back in 2014, the OPEC tried to put the US shale oil industry out of business by lowering prices. But that didn’t work.

So, at the end of 2016, OPEC changed tactics.

They agreed, along with Russia, to cut production to push prices higher. Since then, oil prices have been creeping up.

Growing tensions could push oil prices higher

Now, with OPEC cutting production, plus the possibility of Iranian sanctions and trouble in the Middle East and Venezuela could mean that we see higher oil prices.

Iran is the fourth largest country with proven oil reserves, behind Venezuela, Saudi Arabia and Canada. Iran is also the third largest OPEC oil producer.

Saudi Arabia has said that it will take the necessary measures to avoid an oil shortage. Yet, as you can see in the chart below that shows global oil and supply demand balance, we have an undersupply. One that it is expected to go till at least the end of the year.

S&P 500 Index Chart. 18-04-2018

Source: RBC Capital Markets
[Click to enlarge]

As the OPEC and Russia have cut production, the US has also seen their oil inventories drop.

Who will benefit from oil price rises? Well, certainly oil producing countries. Countries like Saudi Arabia, Russia, Venezuela and Colombia.

Meanwhile, large oil importing countries will see the most damage. One of those in particular is China. Last year, China passed the US as the world’s largest crude oil importer and is driving global oil demand.

Other countries that could feel the effect of higher oil prices are India, Japan and South Korea.

The US is still one of the biggest importers. But, higher oil prices could mean that the US and other countries start bumping up shale oil production.

There are increasing regional tensions in the Middle East, and trouble in oil producing Venezuela.

There is also a supply shortage after Russia and the OPEC agreed to cut production.

So, oil at US$100 a barrel by next year? Yes, we can definitely see that happening.

Yet any conflict or escalation of tensions could create a shock on the oil price, and drive prices even higher.

But for now, with tensions rising, expect higher oil prices.


Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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