Why the surge in prices?
As President Donald Trump decided to withdraw from the Iranian Deal, concerns over global oil supply getting squeezed escalated, sending Brent Crude to $76.95 – almost a 3% increase from Wednesday’s market open.
How is the Iran Nuclear Deal related to oil prices?
The P5+1 (The UK, US, China, Russia, France and the +1 Germany) signed a pact with Iran in which Iran vouched to hinder their nuclear ambitions in exchange for lighter sanctions on its oil exports, allowing for a boost in global supply.
How much does Iran contribute to global oil supplies?
Now to put things into perspective, Iran is the 3rd biggest OPEC (Organisation of the Petroleum Exporting Countries) producer, which makes them heavy hitters in the production trade. They produce roughly 2.5 million barrels every day, which pretty much covers about 3% of global demand. Everything’s slowly coming together, now right? President Trump abandoning the Nuclear Deal and reinstating sanctions on Iran will effectively lock about half of their oil in the ground. After all, with such sanctions on exports would it be worth it for them to even drill it? Having oil is great, but what can you do with it if you can’t sell it? If we’re going to be completely honest though, the rise in oil began before the U.S’ departure from the accord – it began as soon as President Trump was elected in November 2016. Brent Crude is now up 50% YoY.
Is Iran the only force at play?
To answer simply, no. Very rarely do we see one force at play in the energy markets. It’s usually a knock-on effect. For the last three years, OPEC has been trying to help oil prices to higher levels following 2014’s oil glut, when prices plummeted from above $115 p/b to LESS THAN $30 p/b. This global glut was a result of an oversupply from not only desperate OPEC members but Russia, Venezuela and the industry’s newest arrival – U.S fracking firms which pumped insane amounts of oil and gas into the markets. But as I previously said, very rarely do we see one force at play in the energy markets. Let’s not forget the massive shift from fossil fuel to renewable energy, (solar, wind, hydropower and geothermal) which left supply untouched but diminished demand, putting further pressure on prices.
Did OPEC succeed?
The IEA (International Energy Agency) believes that production cuts from OPEC’s 14 members and Non-OPEC affiliates, like Russia, has indeed managed to meaningfully support oil prices. In a recent report, they said that “with just under half of global oil supply subject to restraint and oil demand growing steadily, the impact … has been substantial.”
Will consumers and businesses be affected?
Great question and this one concerns all of us. In a previous article I discussed how oil is “a much bigger part of our life than we think” listing some common items we all use that are made from petroleum. With the recent rise in prices, manufacturing these items is very likely to become more expensive, and ultimately their price will go up. Car fuel? No exception. Prices at the pumps for one liter of unleaded petrol have risen from 2016’s £1 to today’s £1.20. The same thing has happened to gas prices, whose price movements can usually be traced back to oil have also seen a steep increase. Is it safe to say that gas and oil prices have been two of the main contributors to inflationary pressure and have reduced consumer’s disposable income? Did I forget to touch on the transport industry? They’ve been hit too. If it costs them more to transport oil, then oil needs to get more expensive to cover the costs.
Will this increase in prices affect economic growth?
A sustained increase in crude prices could definitely result in slower economic growth and perhaps higher inflation as corporate profits and consumer spending would take a blow. AJ Bell, an esteemed financial advisor commented on exactly this saying, “history suggests that it is only when oil prices have doubled year-on-year that global growth really starts to feel the pinch. The price spikes of 1974, 1979, 1990 and 1999 all served to usher in recessions, and a near-doubling in crude in 2008 may not have helped matters than either, while even the rapid rise in summer 1987 will conjure up memories of stock market chaos.”
This article is for educational and informative purposes only and should not be considered as investment or trading advice.