Saudi Arabia: Geopolitical risks continue to push up oil prices
Despite key producers’ efforts to stabilize the market, oil prices continued to rise in recent weeks amid the war of words between the U.S. and Iran. On 26 July, the OPEC oil basket traded at USD 73.6 per barrel, a 1.3% increase from the same day in June. The price was up 14.2% from the start of the year, and 51.8% higher than on the same day in 2017.
Several factors not entirely related to fundamentals had been driving the evolution of oil prices since May. The U.S. decision to reinstate sanctions against Iran sparked an escalation of tit-for-tat threats between the two countries. Given that around one-third of the world’s oil traded by sea navigates along the Iranian coast, this triggered concerns of disruptions to the global oil supply. Moreover, the 25 July attack of Saudi oil tankers by Iranian-backed Houthi rebels in the Bab-el-Mandeb strait—which connects the Red Sea to the Gulf of Aden—added to concerns about global oil supply.
On the flip side, increasing trade protectionism, tighter global financial conditions and signs that global economic growth has likely peaked led investors to bet that demand for oil will slow in the medium-term, exerting downward pressure on prices. News that Saudi Arabia and other global players have started to pump more oil to ensure the oil market remains adequately supplied in the wake of declining production in Libya and Venezuela, and in anticipation of supply shortages from Iran, helped stabilize oil prices in recent weeks. Nevertheless, investors are wary that OPEC’s spare capacity, especially of Saudi Arabia and Russia, could be insufficient to offset potential supply shortages.
Combined oil output among OPEC members rose from 32.15 million barrels per day (mbpd) in May to 32.33 mbpd in June, according to the cartel’s latest Monthly Oil Report. The increase was mainly due to higher output in Saudi Arabia, which pumped an astonishing figure of more than 400,000 barrels per day compared to May. Oil output also increased in Iraq, Kuwait and the UAE. In contrast, crude output in Angola, Iran, Libya and Venezuela fell significantly month-on-month.