Protests in Iran, missiles over Riyadh, and the cold weather in the United States have combined to push prices higher.

Oil prices have continued to move higher. Protests in Iran, Yemeni missiles over Riyadh in Saudi Arabia, explosions in Libya’s Sidra pipelines, and cracks in the North Sea Forties pipeline have played a role in lifting prices. Severely cold weather in the densely populated areas of the United States have also driven prices higher, which is expected to spur consumption of heating fuels.

These factors are all likely to be temporary. Supply disruptions don’t have much impact on prices when inventories are high, and so these price movements indicate that inventories are normalizing.

Fears in the Middle East

At least a part of the increase in oil price has been because of fears about rising political tensions in the Middle East. The protests in Iran started with a small rally against President Hassan Rouhani. Demonstrators have blamed Rouhani’s administration for rising prices and slow improvements in the economy. If the Iranian street protests impact oil output and exports, there would be some global impact.

The market may be beginning to think about the risk that Saudi Arabia’s oil output may be affected. Saudi Arabia ranks as one of the largest exporters of petroleum. The argument goes like this: The cause of the Iranian protests has been economic reforms that have pushed up the prices of some staple goods. Saudi Arabia is also introducing economic reforms, including a value-added tax and reduced subsidies on domestic gasoline. So, there’s some risk of protests in the kingdom. However, we are not convinced by this logic. In addition, there has not been even a hint of disturbance in Saudi Arabia.

Supply disruptions don’t have much impact on prices when inventories are high, and so these price movements indicate that inventories are normalizing.

Prices can trend slightly higher

Our fair value model suggests prices can move a little higher, partly reflecting the recent weakness in the U.S. dollar, the normalization of inventories, and the steady improvement in the supply and demand balance.

U.S. shale production and impact on oil

Regarding U.S. shale supply, the rig count has been broadly stable, and it’s difficult to see a large production increase in the first half of 2018. Beyond that, it’s hard to say. It is possible tax legislation and the Environmental Protection Agency’s support of the interests of the extractive industry will boost investment. That would push output higher in the second half of this year.

It is possible tax legislation and the Environmental Protection Agency’s support of the interests of the extractive industry will boost investment.


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The outlook for U.S. and global growth remains solid in 2018. However, the relationship between the improving U.S. economy, the Fed funds rate, and the benchmark 10-year Treasury yield is somewhat of an enigma.