Crude oil prices rose to three-and-a-half-year highs following the news that the Trump administration revoked the nuclear deal with Iran.
Brent crude oil prices, the global benchmark, and US West Texas Intermediate rallied above $77 and $71 per barrel, respectively, in the aftermath of the announcement.
Why are oil prices soaring as US exits Iran nuclear deal?
The rise came after the treasury secretary, Steven Mnuchin, told reporters he did not expect a major oil price hikes because other countries would increase output to offset such losses.
Although Donald Trump’s decision to withdraw from the Joint Comprehensive Plan of Action was not a surprise, reinstating all US nuclear-related sanctions was more than expected, said Barclays analysts in a research note.
Bart Melek, global head of commodity strategy at TD Securities, said this announcement comes at a time where there are increased geopolitical tensions in the Middle East and global crude oil inventories are normalizing after being in a supply glut for the past few years. In the US inventory levels are now below the five-year average.
“There’s a broad consensus that [supplies are] going to rebalance and tighten up, but you throw the possibility of disruptions of flows from Iran, and the markets started to worry,” he said.
The reimposition of US sanctions will be phased in over the next 90-180 days to give companies time to wind down operations.
Does this mean oil prices will return to the $100-plus days of a few years ago? It’s unlikely for now.
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Melek said he sees WTI and Brent crude oil prices not going much higher than $72 and $78, respectively, saying the price rise this week reflects a temporary risk premium rather than actual supply shortages.
Even if some Iranian oil is off the market, Melek said there was capacity for members of the Organization of Petroleum Exporting Countries (Opec) to increase production to make up for the shortfall.
Before the White House announcement, oil traders expected Opec members and Russia to stick to their plan to continue reducing output into 2019, which has helped bring supplies and demand back into balance. That plan could be revisited at the next Opec meeting in June.
Plus there are the US shale oil producers which might make up for any shortfall. Jeff Klearman, portfolio manager at GraniteShares exchange traded funds, said he sees WTI prices holding in their recent range of $60 to $70, provided the strong demand from the EU and US continues, which may require prices staying around that level.
Considering European signatories still support the deal, Iran said it would still comply and there are six months before the sanctions unfold, so there was still time to work something out, Melek said.
This assumes all sides will try to work out something regarding the deal and that there will not be other supply disruptions. There is a lot of uncertainty in the market which stems from the White House itself, said Eric Armitage, chief investment officer of East Alpha, a hedge fund specializing in energy. He noted tweets from Trump a few weeks ago complaining oil prices were too high, but if Iranian sanctions curtail global supply that will only raise prices.
Donald J. Trump (@realDonaldTrump)
Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!
April 20, 2018
“It’s just a mess policy-wise and there is no coherence … nothing is actually making strict sense,” he said.
That leaves the oil market susceptible to price swings. Melek said if talks break down in the coming weeks and months or there is more aggressive rhetoric, which is entirely possible, prices could potentially spike higher. But he said market reactions like that are usually temporary.
“You would really need something material on the ground that would stop flows of oil to get into the triple digits,” Melek said.