Commentary: While the recent surge isn’t over yet, the market is likely to remain well supplied, preventing prices from spiralling too far upward
Brent crude rose above US$75 a barrel last Thursday for the first time this year. That’s up from US$51 at the start of 2019, a 47 per cent rise in less than four months.
Oil prices are heavily swayed by geopolitics — and the geopolitical news has been coming thick and fast. Last year, U.S. President Donald Trump imposed sanctions on Iran, limiting crude exports from the Islamic Republic, the third-biggest producer in the OPEC exporters’ cartel. Over the last six months or so, Iranian exports have halved to between 1 million and 2 million barrels a day — going mostly to China, India, South Korea, Japan and Turkey. Waivers allowing these exports were expected to be rolled over, which is why the market was surprised by the White House’s newly stated resolve to “bring Iran’s oil exports to zero,” denying the Tehran government its principal source of revenue. Beijing may thumb its nose at U.S .sanctions, perhaps Turkey, too.
Yet Iran isn’t the only country where supply is under threat. U.S. sanctions on Venezuela — which produces around 3 million barrels a day — are about to come into effect, as Trump turns the screw on the recalcitrant president Maduro. Libya is again on the cusp of full-blown civil war, which could knock out another million barrels or so. And Nigeria, another 2 million-barrel OPEC producer, remains vulnerable to conflict.
This time, then, the likes of Saudi Arabia, UAE and Kuwait will be sure that U.S. sanctions are operative before making any move to compensate. That reality, along with higher seasonal demand as we move into the Northern Hemisphere’s summer, means oil could keep trading between US$70 and US$80 for several months to come.
Trump knows U.S. sanctions on oil-exporting countries help “the boys down in Texas” and other domestic producers. As oil prices creep up, the frackers can raise more cash, increasing their output even more. Other major oil exporters see that as a threat, of course, given the ongoing battle for global market share.
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