The price of crude oil has surged 20% in the last year. Part of the price climb was the result of stronger global growth and emerging market demand. And in the last six weeks the oil price has headed north again.
In mid-February West Texas Intermediate (WTI) was selling at $59.13. By late March WTI was close to $64.70. A 9.41% rise in under six weeks.
Some of this recent climb has been down to noises from the Organisation of the Petroleum Exporting Countries (OPEC) and Russia that ongoing production curbs will likely be extended into 2019.
But the touching down on US soil of the private jet of 32-year-old prince Mohammed bin Salman for a three-week tour has created more oil price tension.
Iran deal on death watch
The Saudi prince – highly ambitious, business friendly, ostensibly a reformer (he lifted a ban on Saudi cinemas in December and ended a driving ban for women) – wants President Trump to take a tougher line on arch-enemy Iran. If Trump agrees, this could introduce more supply and price pressure.
Fresh sanctions on Tehran could even be imposed – President Trump has made it clear he has a low opinion of the Iran nuclear deal negotiated by the Obama administration.
There is a US quid pro quo for greater Saudi co-operation: more investment in US tech companies and the promise of more military sales to the Kingdom. Are internecine Middle East politics, then, set to drive oil prices higher? Not necessarily.
Sanjeev Bahl, analyst at Edison Investment Research, remains relatively cool on the prospect. He told Capital that any oil price above $60 a barrel will be viewed as "light at the end of the tunnel" by many exploration and production management teams, shifting focus from debt obligations to distribution and growth.
“There is potential for oil prices to move higher as inventories normalise, with the market reverting to pricing in a supply risk premium to reflect the probability of disruption.” This was apparent in early 2018 with disruptions to the North Sea Forties pipeline and Iranian unrest, he points out.
US hardliners move in
Last week the appointment of John Bolton as Trump’s security adviser – Bolton likes to quote George Washington’s advice that preparing for war is an effective way to prevent one – pushed Brent crude over the $70 a barrel threshold. Another hardliner in a key position in the White House has only ratcheted up market tension – and prices.
There are other push-pull factors. Venezuelan oil output, plagued by political and economic stresses, is down around 50% compared to Hugh Chavez’s presidency; President Nicolás Maduro, propped up by the military, continues to cling to power.
US shale production recently rose to a record 10.4m barrels a day, US government data claimed. By the end of 2018 the US could be pumping 11m barrels a day – higher than both Russia and Saudi. Yet earlier in March BHP Billiton CEO Andrew Mackenzie said he thought US shale output had the potential to peak within just a decade.
“While I think the shale business will last and offer some very decent returns, especially shale oil, for the better part of a decade, our understanding of that is that is not going to last forever,” Mackenzie told a FT Commodities Global Summit.
Some critics of US shale production have claimed the grade of much of US shale remains too light – not all barrels of oil are equal – and unsuitable for jet fuel and diesel refining.
Meanwhile a deteriorating war of words – plus punitive action on trade tariffs – between the US and China augurs ill for global trade, which inevitably hits oil demand: Trump says he's determined to impose $60bn in tariffs on Chinese imports plus clamp down on tech acquisitions by Chinese companies.
So a lot of conflicting forces. One oil bull though is RWC Partners’ John Malloy. His fund returned 44% last year versus the MSCI Emerging Markets Index return of 37%.
“The supply side has been the challenge,” he says, “but with both OPEC and non-OPEC members working together to limit supply, and US shale production actually coming in lower than expected, the current price range could prevail for some time.”
Malloy’s view on shale production output is not universally shared though. Meanwhile, he cites stocks such as Brazilian-based Petrobras and UK-listed Tullow Oil (196.95p, up +8% in last week) as bargain buys currently. Further ahead, the next waiver for Iranian sanctions looms on 12 May. Trump looks unlikely to extend it, goaded on by Bolton and new national security adviser Mike Pompeo, another hardliner.
A US killing of the Iran deal would destabilise relations with Europe and far beyond. This would mean – surely – a one-way trade for oil prices.