Here#39;s why crude oil prices jumped to $80/bbl

By Hareesh V

Oil prices rallied to near four-year highs, reinforced by renewed global geopolitical tensions, OPEC-led pact to cut supplies and rising global demand.

The U.S WTI crude oil is trading near $ 72 a barrel its highest level since November 2011, while its Asian counterpart Brent is trading at a premium to WTI, hovering near $ 80 a barrel.

Increased instability in the Middle East alarmed the global oil market. The decision was taken by the U.S. President Donald Trump to quit the multinational nuclear deal on Iran, the third top producer of crude oil, which raised worries over exports from the country.

The U.S announced that they would withdraw from the 2015 nuclear deal apart from planning new sanctions against Iran.

On the expiring six-month wind-down period, a wide array of Iran related sanctions are under U.S pipeline. In the 2015 deal with Iran and six major powers, Iran agreed to curb its nuclear programme against lifting most international sanctions that hit the country’s economy badly.

Iran produces four million barrels of crude oil per day contributes, which is almost four percent of the global output.

Fresh sanctions could hit output from one of the top OPEC’s top producer, which would eventually lead to high global oil prices as buyers would be forced to compete for alternative suppliers.

Intensifying Libyan conflicts affecting production from the country and concerns over Venezuelan output also aided the sentiment. A report from IEA (International Energy Agency) showed that output from Venezuela, the country with world’s largest oil reserves, has plummeted sharply in the wake of the nation’s economic crisis. The country is besieged with hyperinflation and its inflation rate is so far the world’s highest.

Oil gathered momentum after the OPEC, Russia and other major oil producers decided to cut output with a view to ease supply glut and prop up oil prices.

The group has decided to extend the pact till December 2018. As per the deal, OPEC and other members are agreed to cut daily production by 1.2 million barrels, almost 2 percent of global production.

However, a recent OPEC report indicates that major oil producers were cutting more than required under the deal due to a sharp decline in production from Venezuela. At the same time, the report also shows that global supply glut has been virtually eliminated.

The goal of supply cut was to reduce the excess global oil stocks to a five-year average. However, even as the global stocks has already lessened, OPEC is not ready to end the supply cut deal immediately or pump more oil to recuperate shortage from the Iranian and Venezuelan oil.

OPEC and other oil majors will be meeting in June and may review the policy.

On the price front, after the supply cut deal started since June 2017 global oil has gained about 40 percent. Unfortunately, domestic futures prices rallied more than 75 percent during this period due to feeble local currency.

A week INR resulted in higher landed cost as the country meets its large part of oil demand through import.

In the meantime, burgeoning U.S. shale production is likely to hinder major gains in oil. U.S. shale oil production has been rising for the last several months.

Steadily rising oil prices encouraged U.S. shale oil producers to increase output, driving U.S. oil production to record levels. Data shows U.S shale output is expected to rise this year as well.

Though higher U.S output may offset the OPEC shortfall, rolling geopolitical tensions are likely to keep oil prices firm and the Asian benchmark may remain positive until the ongoing geopolitical tensions easing out.

A close above $ 72 a barrel, $ 78/85 are the resistances for U.S WTI crude while strong support is placed at $ 58 a barrel. In the domestic market, prices likely to stay firm unless any correction in overseas prices or recovery in Indian rupee.

Disclaimer: The author is Head, Commodity Research at Geojit Financial Services. The views and investment tips expressed by investment expert on Moneycontrol are his own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.