The unstoppable path towards $100: Fuel prices on fire
Oil is climbing again.
More evidence is fueling the narrative that argues a clear path of little resistance to $100 or more.
Growing data that Iranian oil exports are decreasing have pushed oil prices higher on Tuesday, but Hurricane Michael in the Gulf of Mexico is having a hand in this with the US Bureau of Safety and Environmental Enforcement reporting that 39.5% of oil production and 28.4% of natural-gas production in the Gulf of Mexico has been shut in.
Reuters reports Brent crude futures rising 81 cents to $85 a barrel on the ICE Europe exchange, following a pendulum swing between a 4-year high of $86.74 last week and a low $82.66 on Monday.
U.S. West Texas Intermediate (WTI) crude futures gained 49 cents to nearly $75 a barrel.
The Iran quota affair
Iran’s crude exports fell further in the first week of October, according to tanker data and an industry source, as buyers sought alternatives ahead of U.S. sanctions that take effect on Nov. 4, according to Reuters.
Iran exported 1.1 million barrels per day (bpd) of crude in that seven-day period, data showed, down from over 2.5 million bpd in April and 1.6 million bpd in September.
Saudi, OPEC’s biggest producer, indicated via a Bloomberg interview with Saudi Crown Prince Mohammed Bin Salman, it would increase crude output next month to 10.7 million bpd.
Oil price rise
Analysts at Commerzbank said signs of a perceptible decline in oil supply were allowing oil prices to overcome the weakness seen at the beginning of the week when the US said it issue waivers on some Iranian crude importer, reports Market Watch.
In the past seven weeks, the price of Brent crude has risen 18% on supply concerns triggered by looming US sanctions on Iran, the collapse of Venezuela’s economy and bottlenecks building in the US shale industry, according to the Financial Times (FT)
“It now sits near a four-year high of $85 a barrel, prompting bets that triple-digit prices could soon be around the corner,” said FT.
Continued price ascendance
Forbes said that traders are betting on a return to $100 prices, and banks are also baking it into their forecasts.
In a note last week, HSBC said it sees “real risks of this happening” by 2020.
Following the 2014 oil price crash, Capex on exploration was stifled, and this will negatively impact supply, helping spike prices. WoodMac recently issued a warning that not enough oil discoveries are being made to replace capacity, creating a supply gap that could reach 3 million bpd by 2030, 9 million bpd by 2035 and a 15 million bpd by 2040.
The Financial Times (FT) said more shale gas supply, at least over the medium term, could rein in price rises, but the infrastructure can’t keep pace as US pipelines are running at full capacity, restricting oil exports from America into international markets.
“That’s part of the reason why there’s such a big gap between the price of Brent crude and WTI,” said FT.
History shows that once oil passes the $100 mark it becomes a drag on global growth, hurting consumers, according to FT.
A drop in global demand seems inevitable.
So how will this affect the global economy? It shouldn’t come as a surprise that net import countries would be most impacted by higher fuel costs, according to Forbes.
“Tthe economies that stand to benefit the most from rising oil prices are Mexico, Russia, and Saudi Arabia,” said Forbes.
Emerging Markets’ Vulnerability to Higher Oil PricesU.S. GLOBAL INVESTORS
The International Monetary Fund on Tuesday cut its global economic growth forecasts for 2018 and 2019, saying trade tensions and rising import tariffs were taking a toll on commerce while emerging markets struggle with tighter financial conditions and capital outflows.
The IMF said the global economy is now expected to grow at 3.75 this year and next year, down 0.2 percentage points from an earlier forecast
The fund also cut its forecasts for global trade volume: The total good and services flow is expected to grow by 4.2% this year and 4% next year — down 0.6 and 0.5 percentage points, respectively, from earlier estimates.