3 Reasons Oil Prices Are Rallying Above $70

3 Reasons Oil Prices Are Rallying Above $70

Over the last few months, we’ve seen oil prices rise to levels we hadn’t seen in over 3 and a half years. 2014’s global supply glut caused a melt-down in the energy markets and only now are we seeing some sort of a steady, although volatile, rise to fresh highs. Many analysts are attributing this recent rally to the possible restoration of U.S sanctions on Iran, but also say that that factor alone is more of a “buy the rumor and sell the fact” response. There are a number of drivers that have propelled oil’s benchmark to surpass the $70 a barrel level, and yes U.S sanctions are a part of it, but not quite the whole story.

 

1. OPEC AND NON-OPEC PRODUCTION CUTS
OPEC’s (Organization of Petroleum Exporting Countries) efforts to hinder production have most definitely had a major impact and influence on oil prices. According to Energy economist at WTRG Economics, James Williams, “the number one reason is the OPEC/NON-OPEC accord led by the Saudis and Russians to limit production and lower the exceptionally-high petroleum stocks.” These measures were taken in early 2017 and still run through this year, calling for all major oil producers (OPEC and NON-OPEC) to cut their crude production by at least 1.8 million barrels a day in an attempt to cool off the longstanding global glut.

 

A recent survey conducted by S&P Global Platts, showed that crude production dropped for the third month in a row to reach a one-year low. In March production was at 140 million barrels a day while April saw a significant drawdown, with a production of 32 million barrels a day. To put things into perspective, OPEC is about 730 thousand barrels a day below their ceiling of 32.73 million – and this is after every single country’s quota under the agreement has been counted.

 

2. RISING DEMAND
Another factor that has greased the wheels of the considerable impact on international oil inventories is the ever-growing demand. James Williams says that this demand for oil can be traced back to healthier economic growth. When an economy is healthy, people have more disposable income and so will consume more. How does consumption tie in with Oil’s rise? Glad you asked. Although petroleum is mostly used for fuel (jet fuel, gasoline and heating oil), it’s a much bigger part of our life than we think.

 

One word. Plastic. What is it made from? Petroleum. Where do we use plastic? Everywhere, ok almost everywhere – from our cars, to our houses, to our computers and even our clothing. You’ll find an interesting list below and suddenly every cent in movement starts seeming very crucial – whether you trade or not. I mean, if you use any of the below products, price swings effect you too.

 

Another interesting statistic by IEA (The International Energy Agency) has placed global demand for oil and its derivatives at 99.3 million barrels a day, a significant increase from last year’s 97.8 million. Does this not further validate James Williams’ statement?

 

IRAN SANCTIONS – YES OR NO?
Now, while OPEC and NON-OPEC members along with rising demand have played a significant role in the recent oil climb, some traders think that the looming question of whether or not the U.S will reinstate sanction on Iran has played an even bigger role. We’re not here to argue which one has had more of an impact because it’s more of a knock-on effect, but there is no denying that geopolitical uncertainty ranks somewhere in the top 3 reasons.

 

For those new to the U.S-Iran saga, Tehran signed a global agreement in 2015 with the P5+1 and the European Union to roll back its nuclear program and in turn receive relief on sanctions. This agreement was signed before Donald Trump took his seat in the White House and by U.S law is allowed to pull out if he feels it no longer serves the economy. On late Monday, POTUS Donald Trump tweeted that he would be announcing his decision on the Iranian nuclear deal on Tuesday which puts him four days ahead of his deadline.

 

Some analysts are saying that should the President decide to pull out, we could see each barrel rise by as much as $10. Was OPEC’s forecast of $70 a bit too loose? But then again, what market can price in a Donald Trump? On the other hand, James Williams believes that this scenario could cause prices to “weaken a little” but it would be more of a “buy the rumor and sell the fact” response, as we previously mentioned.

 

It now becomes clear that there are more forces at play, especially with the world’s biggest nations in this game. “I will be announcing my decision on the Iran Deal tomorrow from the White House” – and so we wait for POTUS Trump to paint the picture.

 

 

Disclaimer:
This article is for educational and informative purposes only and should not be considered as investment or trading advice.

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