While US WTI oil prices have remained at a sharp discount to the more globally reflective Brent crude price, both have risen this year, with Brent at a nine-month high of $122.72 per barrel this week after rising 13 percent in dollar terms since January.
Although this is far from the peak of $150 set in July 2008, it is at an all-time high in sterling of £77.71 per barrel and is flirting with a euro high at €92.70 per barrel, just off the 2008 peak of €93.50 and a crippling high price for a region on the edge of recession. Indeed, oil consumption has already begun to react to the combination of rising prices and stagnant growth, according to the FT.
Official data show deep drops in year-on-year consumption in European countries, such as Italy, in January. The International Energy Agency forecasts that Europe’s richest countries will witness the largest drop in oil consumption of any region, contracting by 340,000 barrels a day, following a drop of 290,000 barrels per day last year in what was then considered to be a period of economic recovery.
The oil price is being pushed and pulled by two main drivers. The first and so far the most influential has been the growing fear of supply disruption to crude exiting the Persian Gulf via the straights of Hormuz — let’s say, The Iranian Factor.
As progressively more bellicose language has come out of Tehran, oil traders have taken the easy option and forward-covered their requirements, driving up the price of seaborne oil as evidenced by the Brent crude price. Additional impetus has been added by the loss of some 300,000 barrels a day from South Sudan, following that region’s war of (mostly) words with North Sudan over transit fees.
Bulls also point to Libya’s production recovery flattening; the failure of Iraq to reach previously projected production rates; and Syria’s rapidly deteriorating situation, as reasons why the oil price is destined to go higher. Indeed, the bulls were much in evidence at the International Petroleum Week in London where traders and executives talked about $120 per barrel as the floor for the market and some ventured forecasts of oil hitting $150 a barrel or higher if the Iran situation goes wrong.
And the flip side of the coin? Continued in Part Two…