OPEC had made it widely known that they saw $70 as the new benchmark of oil, but their forecast fell short by $5 as in yesterday’s trading session prices hit the $75 mark. These levels are the highest we’ve seen in about three years and if we take a closer look, we can trace the movement back to concerns over the likelihood of sanctions on Iran from the U.S. Brent Crude managed higher levels for the sixth day in a row, trading past the $75 handle before prices retraced back to what are considered normal levels.
Although we’re talking about physical barrels here, price surges are eventually reflected in Futures as well. Perhaps not during the same day and perhaps not even by the same margin, but they are.
On the 12th of May, the U.S is due to decide whether or not they’ll be abandoning the Iranian nuclear deal and re-imposing sanctions. A move of the sort on the world’s third-biggest OPEC producer would significantly threaten the oil industry with further tightening in global supply.
Oil prices first started gaining traction when the 14 members of OPEC, along with non-OPEC producers including the Russian Bear, decided they were going to restrict output in order to end the supply glut last year. In November, a unanimous decision was made to extend production cuts until the end of this year.
Now you may be wondering how Trump and Iran’s nuclear accord are related. Tamas Varga, a well-known and esteemed analyst at PVM, says that the possibility of Trump pulling out of the Iranian nuclear accord that was signed in 2015, was a crucial driver in the most recent Brent Crude rally.
“All bets are off on the US staying in the nuclear agreement,” Tamas added. President Trump went on to add that if the European allies don’t fix the “terrible flaws” in this agreement by the 12th of May, then he will reinstate US sanctions.
Other nations that signed the same accord, inclusive of the United Kingdom, Germany, France, Russia and even China, want to keep the agreement which has brought Iran’s nuclear program to a halt in place, in return for lighter sanctions.
Now if the U.S were to break this accord by restoring sanctions then the pact would take a severe blow. Analysts are saying that reinstating sanctions on Tehran could even push prices up by as far as $5 a barrel.
There are divisions even within the U.S regarding how to approach this matter. Of course, we see the classic division of Democrats VS Republicans with the Democrats insisting that the pact shouldn’t be broken as it keeps Iran under control, while Republicans want to abandon the accord altogether.
At this point, it’s worthy noting that although OPEC cut production by a significant amount, those production cuts were somewhat offset by a swell in U.S production.
Brent Crude was trading around the $73 level at 17:00 GMT, while US Crude was trading at around $68.55 after previously hitting the $69.15 level – its highest price since 28 November 2014. I guess we’re waiting for the meeting on the 12th of May to point us in the right direction. Will Trump actually move forward with his sanctions or will global and internal divisions prevail?
This article is for educational and informative purposes only and should not be considered as investment or trading advice.