By John Kemp
Crude oil prices continue to climb despite attempts by oil producers to reassure the market about availability and the existence of enough spare capacity to offset oil lost as a result of US sanctions on Iran.
Recent price moves bear a strong resemblance to previous price spikes in 2007 to 2008 and 2010 to 2012, especially if prices are expressed in euros or yen to eliminate the impact of a stronger dollar this time around.
Brent crude has risen to almost €75 per barrel, the same level it reached in May 2008, on its way to a peak of €93 in July 2008, Only the strength of the dollar against other currencies is masking how high prices have become in oil-consuming countries outside the US.
Prices have already risen to a level that has contributed to a slowdown in economic growth and oil consumption in the past. “Expensive energy is back at a bad time for the global economy,” the chief executive of the International Energy Agency has warned.
The blame-shifting game is well underway, with the US blaming Opec, Russia faulting US sanctions, and Saudi Arabia blaming speculators for escalating prices.
In reality, US sanctions, output restrictions by Opec and its allies, strong consumption growth and position building among the hedge funds have all contributed to the price surge.
Aggressive implementation of US sanctions on Iran has left refiners and traders concerned about the future availability of crude and questioning whether Opec will still have enough spare capacity to offset any other losses.
And oil consumption has grown much faster than most analysts forecast at the start of the year, while many non-Opec sources of supply have risen more slowly than expected.
The oil market has become locked in an upward price trend as hedge funds and market makers all try to maintain neutral or long positions and few speculative players are willing to take the short side of the market.
Oil prices tend to overshoot on the upside (as in 2008 and 2011) just as they have done on the downside (1998, 2009 and 2016) before correcting.
Typically, prices peak only once there is clear evidence of a slowdown in oil consumption growth and/or Opec producers come under intense political pressure to increase production. In the meantime, oil prices have risen to a level that is sending a strong signal to non-dollar consumers about the need to increase efficiency, reduce use and switch to alternative fuels.
John Kemp is a Reuters market analyst. The views expressed are his own.