Oil Up

Recent geopolitical developments have led to a rise in the oil price with WTI recently breaching the $70 mark. Two years ago this Newsletter predicted that oil prices would stay around $50, and this resulted to be quite accurate until October 2017. At that point OPEC supply cuts and the Iranian question helped to spur the price higher. In fact the price will probably soon go even higher.

It has been indicated that MbS would like the oil price to go up to $85 a barrel. Even with the price at $70 economists will have little difficulty in reckoning that inflation will make a comeback rather sooner than later. The Fed target of 2% will easily be found to be too low. The same holds for the ECB. Further assuming that the Fed remains on course for at least two more interest rate rises in 2018 or possibly three plus drawing down its balance, thereby producing tighter liquidity all around, one can reckon that interest rates for corporations will subsequently increase to the point that some companies will suffer financially because they will have difficulty in servicing their debts.

The Iranians appear to have little desire to renegotiate the nuclear deal while the Israelis press the US for support in their aggressive attitude towards the Shiite Republic. As Iran is a major oil supplier and will be hit with more sanctions if any credence is to be given to noises presently emanating from Washington, then higher oil prices are to be expected.

How high the price will go depends on various factors, including the pace of drilling in the Permian Basin. A fall in demand will come about only if there is a global recession and growth slows markedly. Barring all out war and an intensification of the state of hostilities in the Middle East, we expect a price oscillating between $80 and $90 with the geopolitical situation remaining tense.

For American oil companies that have piled up a lot of debt, the price rise comes just in time to make it possible for them to service their debts and convince banks and investors that old debt can be rolled over. Of course the cost of servicing new debt will be significantly higher than it was until recently with interest rates at record lows. Oil producing countries will welcome the rise in price, especially the KSA that needs financing for all its ambitious projects. The same holds true for Russia, which depends on the sale of oil and gas for much of its income. In any case one can expect an exciting second half of 2018 as the war in Syria grinds on with help from the US.

Walter Snyder    


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