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.

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

Darryl Peroni

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".

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