What the current oil price rally means for investors
Since the start of 2019 the global benchmark for oil prices, Brent crude, has enjoyed a rollercoaster ride.
For the most part the direction of travel has been upwards from a little more than $50 per barrel to above $70 per barrel.
The surge is being driven by multiple factors. These include fears of conflict between the US and Iran and the reimposition of sanctions on the latter by the former; conflict and turmoil in Venezuela and Libya; as well as industrial sabotage on key infrastructure in Saudi Arabia.
There have been significant stumbles along the way – for example, oil fell as much as 4% on 26 April when Donald Trump tweeted that he had asked oil producers’ cartel OPEC to take action to keep a
lid on prices.
So far he appears to have been politely ignored and while OPEC or OPEC+ (the moniker which encompasses other major producers like Russia) does not have the influence it did in its 1970s energy crisis heyday, the cartel remains influential.
OPEC MEETING IN FOCUS
Whether oil maintains its current trajectory could depend on how OPEC responds at its next big summit on 25 June.
In truth, given it is the member with the most influence and, crucially, spare production capacity, the response will depend on Saudi Arabia.
In a recent piece of research BoA Merrill Lynch spelled out why the Saudis might be reluctant to ramp up output.
It says: ‘Saudi Arabia has repeatedly stated its intention to give away oil market share in exchange for higher dollar prices in recent months. The rationale behind this decision is purely financial and connected both to its current account and government budget positions.
‘According to our economists, the 2019 budget break-even oil price for Saudi Arabia is around $93 per barrel. In other words, we expect Saudi to
bring production back slowly to avoid a repeat of the fourth quarter of 2018.’
In the final three months of 2018 oil prices fell sharply after Saudi increased its production in the expectation of a disruption to Iranian supply. This was put on pause as the US included more waivers in its sanctions than expected.
Oil price strength is a double-edged sword for UK investors. It is potentially good news for oil majors BP (BP.) and Royal Dutch Shell (RDSB) which occupy heavyweight positions in the London market.
However, when Trump tweeted that a retreat in oil prices to $55 per barrel in November 2018 was a big tax cut for America and the world, he was on to something. Logically the recent strength in oil prices may feel like a tax bill for businesses and consumers.