Oil Prices Reach Highest Level Since 2014

 

U.S. oil prices rose above $70 for the first time since 2014, the latest sign that buoyant economic growth and investor concern about the risk of Middle East conflict are once again reshaping the global energy industry.

The $70-a-barrel milestone represents a victory for Saudi Arabia, which in late 2016 spearheaded a landmark production-cutting deal between the Organization of the Petroleum Exporting Countries and other major producers, including Russia. That helped dry up a massive glut of oil more quickly than many on Wall Street expected.

The rebound is also a relief to U.S. oil companies that endured an oil bust that sent U.S. crude prices as low as $26 in 2016. U.S. refiners have been among the best-performing stocks this year, as demand for the fuel they churn out continues to expand.

But supply, demand and inventories are far from the only factors at work. Oil prices have risen nearly 14% in the past month as President Donald Trump indicated the U.S. will likely withdraw from a 2015 agreement with Iran that eased international sanctions on Iran in exchange for curbs to its nuclear program. President Trump tweeted Monday that he will announce a decision on U.S. participation in the agreement Tuesday afternoon.

Mr. Trump’s decision over whether to withdraw from the accord with Iran raises the prospect of renewed sanctions that could curtail that country’s oil output.

“There was this view that we were post-geopolitics” as a result of an oversupplied market, said Helima Croft, head of commodity strategy at RBC Capital Markets. “Now we’re really seeing the reckoning for that.”

Rising crude prices will pressure margins at U.S. transportation companies like airlines, railroads, trucking companies and delivery services, which will be paying more for fuel after years of cost savings. Auto makers could have cause for concern, as the SUVs and trucks that have driven U.S. auto sales lately may become less appealing to consumers as prices at the pump edge toward $3 a gallon.

Light, sweet crude for June delivery rose 1.45% to $70.73 on the New York Mercantile Exchange. Brent, the global benchmark, gained 1.74% to $76.17. Both benchmarks are at their highest since November 2014. Prices pared gains after Mr. Trump’s tweet in late trading, as traders and investors took profits ahead of the decision on Tuesday.

Crown Prince Mohammed bin Salman of Saudi Arabia is aiming to push global oil prices to at least $80, senior Saudi officials have said. Higher prices give the Saudis more breathing room to enact a wide-ranging economic overhaul, analysts said.

But some OPEC members have been more cautious, looking to their prospects for production further out in the future. Iranian oil minister Bijan Zanganeh told The Wall Street Journal in March that oil prices around $60 were ideal.

There are “countries who are concerned that too high an oil price will actually slow down demand,” said Amy Myers Jaffe, a senior fellow at the Council on Foreign Relations. “If you take the 10-year view, having a period of very high oil prices is definitely going to accelerate the trend away from oil.”

Factors outside of OPEC’s control have helped lift oil prices. For example, Venezuela’s output has been falling faster than most expected, as its political and economic crises worsen. ‘“Every day there’s some new story that’s not good for their production capacity,” said Ms. Croft.

Some analysts have said that geopolitical risk has caused unwarranted panic and if fears turn out to be overblown, investors could rush for the exits.

“A de-escalation of the geopolitical tension is likely to trigger an outflow from investors,” Citigroup analysts cautioned last week.

In the U.S., shale producers have already pounced on higher prices, hiring workers and buying equipment. Output has climbed above 10 million barrels a day—its highest ever.

“Higher oil prices are not necessarily bad for the U.S. economy. It’s not the same black and white that it used to be,” said Joe McMonigle, senior energy policy analyst at Hedgeye Risk Management.

And since a ban on most crude oil exports was lifted in 2015, shipments of U.S. crude have flowed to Europe, Asia, and South America and gained a foothold in markets once dominated by Middle Eastern suppliers.

While U.S. consumers have already started paying more at the pump, oil prices would have to climb to $80 to $100 a barrel before it would crimp demand, refiner Valero Energy Corp. told investors last month.

But the prospect of higher inflation could put pressure on the Federal Reserve to raise interest rates more aggressively. In March, the Fed’s preferred measure of inflation rose 2% compared with one year ago, the largest monthly increase since February 2017.

“While we do not expect the rise in oil prices to have a big negative impact on the overall U.S. economy…we caution against being too complacent in assuming that growing U.S. energy production will insulate the economy,” Pacific Investment Management Co. said in a Monday blog post.

 

[Wall Street Journal]

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