As oil prices reached USD 75 per barrel, the highest level in four years, the price of fuel is expected to rise this summer. According to experts, this is a long-term trend, the Financial Times reports.
According to FT, the main reason for the expected increase in prices is the tightening of the markets over the past 18 months. The inventories of crude oil that had built up during 2014-16 have largely been worked off because of strong demand driven by a booming global economy and supply cuts by Opec and Russia, the FT reports.
Next, the future role and the trajectories of Russia and Opec are seen as very relevant for the market. The supply cuts by Russia and the Opec have removed at least 1.8m b/d from the market since the start of 2017.
According to FT, most traders and analysts think the status quo ill be preserved, and the two will not end their supply cuts. While Moscow has expressed greater concern about the impact of the USD 70 price oil on stimulating rival supplies such as US shale, it seems content for now to stick with Opec. Moreover, the de facto leader Saudi Arabia has indicated it believes there is more work to be done. Saudi energy minister Khalid al-Falih has spoken of the need to boost greater investment in new supplies.
Geopolitical risks are also a major factor causing the increase in prices. The oil market always watches closely for risks of supply disruptions that could upend the delicate balance of supply and demand, the FT notes. Moreover, when supplies are already relatively tight they can take on an outsized importance.
For instance, the most immediate risk is possibility of US president Donald Trump, choosing to withdraw from the Iran nuclear deal. This move could also be accompanied by the reimposing of sanctions on its oil exports. A decision is expected to be made next month.
The second hotspot is Venezuela where oil output has already fallen by at least 500,000 barrels a day because of the economic and political crisis in the country. Also, there is little hope that the state oil company PDVSA will be able to reverse the trend. Plus, the risk of additional US sanctions on the government of Nicolas Maduro of Mexico, as well as the conflict between Opec kingpin Saudi Arabia and Houthi rebels in Yemen and the unstable situation in Libya could have a weight on the global situation.
Not least, hedge funds and other speculators have been attracted to oil this year but only partly because of the geopolitical risks. Investors were already heavily long the market, having built up a record position in crude at the start of the year.
Finally, US shale is on the up. Total US output expected to expand by roughly 10 per cent, or 1.4m b/d this year and producers in the US are also generating free cash flow because of higher prices.