Will oil’s Trump-bump last?

published 14 April 2017

"Tensions in the Middle East are rising," says Andy Critchlow on BreakingViews, "but that doesn't mean the oil price has to". Donald Trump's missile strike on Syria last week helped boost Brent crude to a four-week high of $56 a barrel. Syrian production is negligible; what worries traders is that its ally Iran, which has been raising output, could retaliate. The US could then insist on further sanctions against the Islamic Republic.

Yet Iran's biggest customers, in Asia, could then keep importing Iranian oil anyway, especially if they are unsettled by US unilateralism, says Critchlow. Saudi Arabia could make up for Iranian shortfalls: "its spare capacity alone is half Iran's total output". Iran could block the Strait of Hormuz, through which a third of seaborne oil passes. But the waterway is "heavily defended".

Russia's reaction will be closely watched too, with unpredictable consequences for regional politics. But for now, the key point is that the world is still "awash in oil", as Saxo Bank's Ole Hansen told CNBC.com. The market has tuned out evidence of ample supplies in the past few days. US crude stockpiles, which hit record levels in March, ticked up again last week. There will soon be more now that US shale production is on the rise again. US oil-rig counts have climbed for 12 weeks in a row.

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It's also worth bearing in mind, as Liam Denning points out on Bloomberg.com, that if events in the Middle East escalate, any spike would come undone because fears of supply disruption would produce "immediate responses from producers, consumers and speculators that would tend to loosen" the market rather than tighten it. Producers would raise output, consumers use less, and speculators store oil in anticipation of higher prices thus adding to stockpiles.

For now, however, the "tug of war" between Opec and the resurgent US shale industry is likely to remain the key feature of the oil market. Opec's output cuts are a bullish factor, but any rapid price increases will encourage another jump in US production. Throw in rising demand now that the world economy has picked up, and the $52-$56 a barrel range that oil prices have been moving in for the past four months could shift slowly upwards.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.