Oil will come off the boil

The price of Brent crude, the main oil-price benchmark, has broken through $75 for the first time this year. But the rally won't last.

945_MW_P04_Markets_Bottom
US sanctions against Iran have propelled prices above $75 a barrel

The price of Brent crude, the main oil-price benchmark, has broken through $75 for the first time this year, marking a 50% increase since 1 January. A US waiver that had enabled China, India, Japan, South Korea and Turkey to continue buying oil from Iran after the reimposition of sanctions last year expired on 2 May, while unrest in Libya and American sanctions against Venezuela have also raised concerns about global supply.

The "sense of pessimism" that hung over the global economy at the turn of the year has receded in recent weeks, says The Economist, but an oil-price shock could yet "reinstate the gloom". The waiver expiry alone will remove more than one million barrels per day about 1% of global supply from circulation. Pricier energy is bad news for Chinese and European economies, and could worsen crises in Turkey, Argentina and Pakistan. Growth will suffer if the trend continues, say John Payne and Gabriel Sterne of Oxford Economics."All it would take is one more shock to supply" for the commodity to hit $100 per barrel, the level at which prices could begin to weigh significantly on global output.

Ignore these overly hasty predictions of doom, says Liam Halligan in The Sunday Telegraph. "The market is likely to remain well supplied." Amid all the geopolitics, US crude production has risen by a fifth to 12.2 million barrels per day since early 2018, thanks to the fracking boom. America is actually "pumping more than Saudi Arabia and Russia" at present, and oil-price hikes will only encourage the "boys down in Texas" to frack even more.

Russia will also be sorely tempted to increase output to gain a bigger share of the Chinese market (it is already the Middle Kingdom's second-biggest supplier). Expect this oil rally to "run out of fuel".

Recommended

Commodities look cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
What escalating tension between Iran and the US means for oil prices
Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020
Rising output will keep a lid on the oil price
Oil

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019
Brace yourself for pricier oil
Oil

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020