Last year at this time WTI (West Texas Intermediate) traded for under $48 a barrel while the world benchmark, Brent could barely keep above $50. In the span of a year, WTI now stands at just over $71 while Brent is well over $77. Both are testing highs not seen since American Thanksgiving in November 2014, just after OPEC’s ill-fated decision to flood the world with crude to shake out U.S. shale producers and regain control of their global cartel’s market share.
The rapid and sustained rise in oil is the product of many factors, but none more important than the continued rise in demand for the hydrocarbon. By year’s end, the collective use of oil will tip 100 million barrels a day, an increase of nearly 2 million in daily utilization with much of this in emerging economies in Asia, Latin America, and Africa. Conservation, the shift to renewals, and the West’s aging population may account for reduced oil demand in certain parts of the world. But considering the meteoric rise in American shale output (now approaching 11 million barrels a day), Canadian oil at maximum capacity due to regulatory dithering and constraints due to environmental activism (much of it foreign-based and funded), and the return of geopolitical tensions, oil is back with a punch.
The much-anticipated decision this week by President Trump to withdraw from the Iranian Nuclear deal is a clear portent of crude’s sustained values. With what some estimate will mean 800,000 barrels of Iranian oil off the market due to U.S. sanctions, global stocks will quickly head what could be a nearly 1 million barrel deficit by year’s end, especially as Secretary of the Treasury Mnuchin has made clear the new sanctions will be in place by November 4, less than 180 days away. More importantly, the administration has also extended sanctions to countries allowing insurance of Iranian oil-laden marine vessels. Without exemptions, the rapid decline of Iranian output and an escalation in oil prices seems inevitable.
For Saudia Arabia, who has pledged to backfill the deficit, their interests where a foregone conclusion: $80 oil is key to the Kingdom’s avowed strategy of seeing oil rise in order to replenish their treasury. So while Saudia Arabia and OPEC can achieve the goal of pushing oil to the $80 threshold and compensate for the loss of Iranian crude, it does so at the risk of other factors that could see oil prices run amok: Venezuela’s oil industry and output in full collapse, global inflation and given years of capital expenditure diversions away from new oil production, real shortages, unable to meet rising global demand for the hydrocarbon.
As far as energy prices are concerned, in this context, a rolling stone gathers no moss.