Oil Prices Hit Four-Year High, but Will the Surge Continue?

For the first time in a long while, geopolitics has been driving oil prices higher in an already tight market. With oil prices recently hitting a four-year high, gasoline prices have been climbing too, and analysts are carefully watching developments including the US withdrawal from the 2015 nuclear pact with Iran and re-imposition of economic sanctions on the country. Fred Fromm, portfolio manager of Franklin Natural Resources Fund, shares his views on oil’s recent milestones, and how he sees buoyant economic growth and investor concern about Middle-East risks once again reshaping the global energy industry.

Benchmark global oil prices have increased roughly 19% year-to-date and 39% over the past year, hitting the highest levels since 2014.1 Brent crude oil, the global benchmark, has reached $80 a barrel (bbl) while West Texas Intermediate (WTI), the North American benchmark, has passed $70/bbl.

A host of factors have caused the surge in oil prices. Positive economic factors have led to increased demand, and a multi-year overhang in the developed world’s petroleum stockpiles has recently been eliminated due, in part, to producer curtailments.

And in addition to strife in the Middle East—including the US withdrawal from the Iran nuclear pact—the continued decline of Venezuela’s oil production heralds another trouble spot. Venezuela’s economy has entered into a protracted state of collapse and talk of fresh US sanctions is bubbling up.

Behind the scenes, the Organization of the Petroleum Exporting Countries (OPEC) and its allies have finally succeeded in their 16-month campaign to clear the oversupply from the world oil market despite a major upsurge in US crude oil production. Somewhat ironically, the oversupply is a situation they helped create through increased production in 2015, a factor rarely discussed in the media. Saudi Arabia is still producing at higher levels than in 2014, despite reductions since 2016 tied to the OPEC/non-OPEC agreement.

OPEC also boosted its demand forecast for this year, while trimming its outlook for global oil production.