Why are oil prices soaring as US exits Iran nuclear deal?

Why are oil prices soaring?

Donald Trump’s withdrawal from the Iran nuclear deal has raised concerns that the global supply of oil will be squeezed, pushing up the price of Brent Crude on Wednesday by almost 3% a barrel to $76.95.

What does the nuclear deal have to do with the oil price?

When Iran pledged to limit its nuclear ambitions to civil energy production under the deal with the P5+1 group of world powers – the US, UK, France, China, Russia and Germany – sanctions were lifted on its oil exports, giving a significant boost to global oil supplies.

Brent crude hits a three-and-a-half year high

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Guardian Graphic | Source: Thomson Reuters

How big is Iran’s contribution to global supplies?

Iran is the third largest producer in the Organisation of the Petroleum Exporting Countries (Opec), which makes it a heavy hitter in the production of oil. It produces 2.5m barrels a day, equal to about 3% of global demand. Trump’s threat to reimpose sanctions and effectively keep up to half of Iranian oil in the ground has hit the oil price since he was elected in November 2016. The price of Brent crude is now up 50% year on year.

Is Iran the only factor pushing up oil prices?

No. Opec has spent the past three years attempting to push up the price of oil following its collapse in 2014 when the price plunged from more than $115 a barrel to below $30 a barrel. That was a result of an increase in supply from Russia, Venezuela and other Opec nations desperate for cash and an important new arrival on the scene – fracking firms in the US, which had begun pumping huge quantities of oil and gas. The recent cold snap, which affected not only the UK but much of the continent and the US, also sent energy prices upwards as demand spiralled.

Has Opec been successful?

The International Energy Agency says production cuts among Opec’s 14 members and its affiliates, especially Russia, has had a significant impact on pushing up prices. The agency recently said 90% of the supply governed by the Opec cuts was holding to lower production limits. “With just under half of global oil supply subject to restraint and oil demand growing steadily, the impact … has been substantial,” it said.

How will business and consumers be affected?

Prices at the pumps have edged up from about £1 a litre for unleaded petrol in early 2016 to £1.20 a litre today. Gas prices, which tend to track the oil price, have also increased steeply. When the “beast from the east” storm was at its worst, wholesale gas prices stood at a 12-year high. Between them, oil and gas prices have been two of the main factors pushing up inflation and reducing real disposable incomes.

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The transport industry is also being hit by rising costs, which it is struggling to pass on to retailers in a time of squeezed real incomes and weak consumer demand. Rising energy costs are also a blow to heavy users, such as the manufacturing industry.

Will prices keep rising?

The US fracking industry was supposed to ride to the rescue and prevent oil prices from ever soaring again by switching on dormant production rigs. Hundreds of derricks were mothballed when the price of Brent crude fell below $50 a barrel. These can be brought back into production quickly to offset Opec production cuts and meet rising demand. It is why many analysts believed the price would struggle to get above $60 a barrel in the future.

Morgan Stanley was one of the few banks to argue that US shale drillers would not be able to keep up with rising demand. Last year it said the shale sector would need to increase production from about 5.9m barrels a day in 2017 to 7m barrels a day this year to put a cap on prices.

Will higher prices hit economic growth?

Financial adviser AJ Bell said in a note to investors that a sustained surge in crude could lead to inflation or even a slowdown in global economic activity because higher energy and transport costs would hit consumer spending and corporate profit margins.

It warned there could be a substantial impact if prices keep rising: “History suggests that it is only when oil prices have doubled year-on-year that global growth really starts to feel the pinch. The price spikes of 1974, 1979, 1990 and 1999 all served to usher in recessions, and a near-doubling in crude in 2008 may not have helped matters then either, while even the rapid rise in summer 1987 will conjure up memories of stock market chaos.”