Oil price climbs above USD80 a barrel

Oil climbed above $80 a barrel on 19 May as tightening supplies and strong demand took prices back to the highest levels in almost four years. Brent crude has risen more than 50% over the past year as output cuts led by OPEC and Russia have coincided with robust oil consumption, on the back of a healthier global economy and geopolitical upheavals around the world.

“Geopolitics is certainly playing a role in sustaining this price rally but the key developments represent genuine supply losses, not just risks that might not materialise,” said Richard Mallinson at consultancy Energy Aspects.

Iran’s oil exports are in focus after the US withdrew from the nuclear deal and reimposed sanctions against the country’s energy sector, with traders expecting a drop in foreign sales. Venezuela’s oil supplies, meanwhile, have been spiralling downward as political and economic crises take hold of the energy sector, with a series of court orders authorising asset seizures and hindering exports. While prices could take a dip, Mr Mallinson said, oil market participants were witnessing “a structural shift to higher prices” for the rest of 2018 and 2019, not a temporary spike. Brent, the international benchmark, rose more than 80 cents to a high of $80.18 a barrel — the most since late 2014 — while West Texas Intermediate, the US marker, increased to as much as $72.30 a barrel in trading on 19 May. Shares of energy companies have rallied this quarter after a sharp improvement in cash flows and earnings. The MSCI European Energy index, which is made up of companies that include Royal Dutch Shell and Eni, is up 15% since the end of March. The S&P 500 Energy index has also gained 15% over the same period. “Cost savings are still coming through . . . but it’s now coinciding with rising prices. That combination is very powerful,” said Martijn Rats, global oil strategist at Morgan Stanley.

Companies can pay dividends, buy back shares and pay down debt, he said. Swelling supplies from US shale fields, at 10.7million barrels a day, have been expected to fill any gap in global supplies but the industry has faced pipeline constraints and infrastructure bottlenecks limiting how quickly exports can reach the market. Recommended Analysis Oil & Gas Venezuela’s sliding oil exports a boon for prices Some industry analysts, such as those at Bank of America, have eyed a return to $100 a barrel. This has spurred questions about the period when global producers exit the supply cut deal that has been in place since 2017.

“What everyone is grappling with is when does OPEC and its allies step in?” said Helima Croft, global head of commodity strategy at RBC Capital Markets. Saudi Arabia, OPEC’s de facto leader, has said it will work with other producers to alleviate any supply shortages. But people briefed by its energy ministry say the kingdom is reluctant to open the taps for fear it could trigger renewed price falls. Another person said Gulf Arab countries were monitoring full-year price averages before acting. OPEC and its allies outside of the cartel have to engage in a “balancing act”, said Bassam Fattouh, director of the Oxford Institute for Energy Studies. The kingdom has targeted a higher oil price as it funds its economic reforms and plans an initial public offering of its state energy company Saudi Aramco. Cyril Widdershoven, at consultancy Verocy, said for now Saudi Arabia was “reaping the financial rewards” of the cuts deal. But some industry experts believe that higher oil prices could backfire as consumption takes a hit. The International Energy Agency on Wednesday revised lower its global oil demand growth forecasts for 2018, from 1.5m barrels a day to 1.4m b/d.