We expect oil prices to firm around $70-80 per barrel, but a geopolitical shock could send prices soaring even higher. Their march upward has been driven by global demand (China oil imports at all-time high), disruption in Nigeria and expectations of sanctions on supply from Iran and Venezuela.
Higher prices have not generated a rush of excess production from the USA. This would push prices lower, but greater domestic demand has consumed new supply (inventories remain below historical average). Oil producers are also reacting conservatively. Upstream companies have committed to shareholders to take a restrained approach by not ramping up production during temporary price volatility. This strategy in the past has been costly and ending up producing minimal additional profits but plenty of debt. We remain pessimistic that summer demand will meet market expectations. However, we are more focused on geopolitics as the prime mover for further price gains. While Iran’s output will be resilient, due to Europe unwillingness to support US actions, production will slow. Venezuelan production will continue to decline due to social disorder and the likelihood of additional Trump sanctions.
There is speculation that President Trump’s foreign policy hands are tied for fear of higher gasoline prices. We don’t see policy options as so limited. We see a clear rationale for Trump to drive prices higher: energy production is a significant Trump political base. Higher prices equates to jobs, higher wages and capital expenditures in the ‘red’ US states. Sanctions of Iran and Venezuela would also be popular with the supporters. Higher prices also will act as a tax on ‘blue’ states.
By Peter Rosenstreich
