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Crude Oil is trading ~$75 a barrel, up more than 30% this year, and tensions across the Middle East are again dominating headlines. The question is whether this is just another short-term spike or the beginning of something bigger?
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To answer this question, let’s wind back to the early 2000’s. Following 9/11, oil was trading near $17/Bbl. As conflict spread across the Middle East and global demand surged, prices climbed relentlessly, to $147 by CY08. Much of that happened quickly between CY05 and CY08, when oil surged by 170%. If crude oil were to make a similar move from today’s level near $75, it would push prices close to $200/Bbl.
Since CY08, oil has struggled to stay above $100 a barrel during crises, and this is important. A major reason has been the rise of U.S. shale production, which tends to increase supply whenever prices surge.
However, that ceiling only holds when supply chains remain intact, and right now, spare oil production capacity is quite healthy.
This alone raises the argument for $100 as the ceiling, but here comes the big what-if?
Could weakening global supply chains push crude oil higher?
The world’s biggest supply route, the Strait of Hormuz, is under serious threat. This narrow shipping lane carries about 20% of the world’s oil supply. Maritime insurers have begun pulling war-risk coverage for vessels operating in the Gulf as tensions escalate, leaving many tankers unable to move through the region.
At the same time, energy infrastructure is increasingly becoming a target. Iranian drones recently struck Saudi Arabia’s Ras Tanura refinery, the kingdom’s largest oil processing facility and a major export hub. Add to that Venezuela’s production constraints, Ukraine’s attacks on Russian energy infrastructure, and the possibility that China may need to compete for Iranian barrels on the open market, and suddenly, global supply looks far thinner than many assume.
From a technical perspective, crude appears to be breaking out of the downtrend that has dominated the last few years, and if the price can hold above $80 a barrel, a move back to $100 per barrel is entirely realistic if tensions persist. Reaching $200 would require a major supply disruption, but history shows that when geopolitics collides with energy supply, prices can move faster than most people expect.
For Australians, higher oil prices feed directly into petrol, freight, and food prices, and into inflation, which can keep pressure on the RBA to hold interest rates higher.
For investors, however, volatility in the energy market creates opportunity, particularly in energy stocks, which have lagged the market for years and may now be entering a powerful macro cycle. So, stay tuned.
For now, good luck and good trading.
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Dale Gillham is Chief Analyst at Wealth Within and an international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au.
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