TALK­ING POINT

We weigh up the rea­sons be­hind the com­mod­ity price spike and what could hap­pen next

Shares - - CONTENTS -

Why the oil price is at a four-year high

The price of Brent crude oil is at its high­est level in four years above $85 per bar­rel as traders re­act to im­pend­ing US sanc­tions on ma­jor oil pro­ducer Iran and news of a break­through in trade talks be­tween the US, Canada and Mex­ico.

WHAT IS HAP­PEN­ING WITH THE OIL PRICE?

In the last 12 months the black stuff has en­joyed a strong re­cov­ery and it is now at lev­els last seen in Novem­ber 2014, around the time pro­duc­ers’ car­tel OPEC turned a sell-off in the oil mar­ket into a fully-blown rout by fail­ing to curb pro­duc­tion.

Strong growth in the out­put from US shale cre­ated a sup­ply glut and, led by Saudi Ara­bia, OPEC fought an ul­ti­mately un­suc­cess­ful bat­tle for mar­ket share with these new shale pro­duc­ers be­fore ca­pit­u­lat­ing two years later in Novem­ber 2016. The car­tel teamed up with other ma­jor pro­ducer Rus­sia and cut pro­duc­tion for the first time in eight years.

WHAT IS FU­EL­ING THE RISE?

For the most part oil is now ris­ing on sup­ply is­sues, the con­certed ac­tion by OPEC and Rus­sia which helped to sta­bilise prices, and then a se­ries of pro­duc­tion is­sues for ma­jor pro­duc­ers like Venezuela and Nige­ria con­trib­uted to its as­cent.

Most se­ri­ously, Iran, thought to ac­count for around 3% of global oil pro­duc­tion, faces re­newed sanc­tions from the US thanks to its de­te­ri­o­rat­ing re­la­tion­ship with the Trump ad­min­is­tra­tion over its nu­clear am­bi­tions. This is ex­pected to have a ma­te­rial im­pact on the world’s sup­ply of oil when the sanc­tions take ef­fect on 4 Novem­ber.

As bro­ker Can­tor Fitzger­ald ob­serves: ‘Sev­eral ma­jor buy­ers in In­dia and China have sig­naled that they will cut pur­chases of Ira­nian ship­ments, with China’s Sinopec say­ing it halved load­ings from OPEC’s third largest pro­ducer in Septem­ber.’

COULD PRICES HIT $100 PER BAR­REL?

Can­tor notes the num­ber of traders tak­ing bets on prices hit­ting $90 is on the rise, so all eyes may soon be on $100 per bar­rel.

A key con­sid­er­a­tion is that Saudi Ara­bia, the only global pro­ducer thought to en­joy any spare ca­pac­ity, may not have suf­fi­cient re­serves to com­pletely plug a grow­ing sup­ply gap.

If it fails to do so then oil could re­turn to three fig­ures for the first time since Au­gust 2014. This would pro­vide a short-term boost to profit and cash flow at the likes of BP (BP.) and Royal Dutch Shell (RDSB).

WHAT ABOUT DE­MAND?

Global trade ten­sions are al­ready rais­ing con­cerns over the health of the world econ­omy and the in­creased trans­porta­tion costs as­so­ci­ated with $100 oil just adds to this neg­a­tive pic­ture. It could be that the best cure for high oil prices is de­mand fall­ing in a weaker eco­nomic en­vi­ron­ment, although that may not be a pos­i­tive back­drop for in­vestors.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.