Oil price run-up is more than Iran deal

By USAA Investments

The run-up to the White House’s decision to pull out of the Iran nuclear deal has been a strong near-term driver for oil prices, with benchmark West Texas Intermediate crude this week trading over $70 a barrel for the first time since 2014 – and back then, oil was on its steep descent from $100+ territory.

But Iran is not the only market driver – USAA energy analysts Seth Miller and Mark Fischer say strengthening fundamentals are also contributing to higher prices and may continue to be supportive going forward.

An improving supply and demand relationship is the foundation. A sizable supply glut is being worked off faster than expected as the synchronized global growth trend has increased demand for crude at a time when global production has been constrained.

There were news reports last month that Saudi Arabia is targeting a price of $80 or more for a barrel of Brent oil (roughly $76 this week) – Seth says this indicates the Saudis will likely push for an extension of production limits when OPEC meets in June.

Higher oil prices typically encourage greater output, which in turn leads to lower prices as supply overwhelms demand. Current market dynamics, however, suggest a possible variation in the classic “boom-bust” cycle.

Mark points out that non-OPEC policy reasons are also helping to keep the lid on output – these include plummeting production in Venezuela and bottlenecks in the West Texas shale fields that are impeding a price-driven ramp-up.

And where in the past production growth was the key metric for equity investors, nowadays it’s shifting to free cash flow – the result is a bottom-line boost via skinnier capital budgets.