Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
[Gillian Rich, Investor’s Business DAily via NASDAQ.com]
Oil prices rose on Monday to their highest levels since mid-2015 amid political unrest in Saudi Arabia, but there is more than just palace intrigue boosting prices.
Brent futures jumped 1% to $62.67 per barrel, and U.S. crude climbed 0.5% to $55.90. Among oil majors with holdings in Saudi Arabia,Exxon Mobil ( XOM ) was flat on the stock market today , Chevron ( CVX ) edged up 0.1%, after falling out of buy range last week, BP ( BP) rallied 0.9% and Royal Dutch Shell (RDSA) gained 0.8%. BP and Shell are extended out of buy range.
Even before the weekend’s purge of top officials in Riyadh, prices had been trending higher. Here are five reasons why oil prices have been and may continue to be on the uptick:
Crown Prince Consolidates Power
In an unprecedented move, Crown Prince Mohammed Bin Salman ordered the arrests of several high-profile members of the royal family including billionaire Prince Alwaleed bin Talal and Prince Mutaib bin Abdullah, the head of the Saudi Arabian National Guard.
Salman has signaled support for OPEC’s deal with Russia and other nonmembers to curb production and prop up prices. Phil Flynn, senior market analyst at Price Futures Group, said in a note Monday that he expects Salman to continue to constrain production.
But Salman’s power consolidation also comes with some risks, especially as he seeks foreign investment to help fuel economic reforms.
“The arrest of prince al-Waleed bin Talal, Saudi Arabia’s richest businessman with a net worth of nearly $19 billion, could well dampen international interest in investing in the crown prince’s much-heralded Vision 2030 to make the non-oil private sector the new motor of the economy,” David Ottaway, Middle East Fellow at the Wilson Center, wrote in a note.
‘Act Of War’ From Iran
Ramped-up regional tensions are adding upward pressure on prices, and Salman’s stronger hand may also be factor on this front too, as he has been more hawkish on foreign policy.
This weekend, Saudi Arabia claimed to have shot down a missile from Houthi rebels in Yemen near Riyadh. The kingdom is fighting a proxy war with Iran against the rebels in Yemen. Tehran is believed to have supplied the rebels with the missile, but Iran denies the allegations.
The attack could be considered “an act of war against the kingdom of Saudi Arabia,” the Saudi-led military coalition said in a statement Monday.
Output Deal Extension Seen
Analysts don’t expect the power consolidation and increased tensions with Iran to affect the likely extension of the oil output deal. Last year, OPEC, Russia and other top producers agreed to curb production to remove 1.8 million barrels per day from the market to stabilize prices.
Salman has been supportive of the deal as the country needs higher oil prices to hype up Saudi Aramco’s initial public offering and Russian President Vladimir Putin has also shown signs of supporting an extension.
The current production deal expires in March, but analysts expect an update at OPEC’s biannual meeting at the end of this month.
U.S. Shale Is Cooling Off
After looking for ways to expand production, shale producers are shifting their focus to cash-flow discipline and not working unprofitable plays, even as oil prices climb higher.
Devon Energy ( DVN ), Cabot Oil & Gas ( COG ), EOG Resources (EOG) and other shale exploration and production companies showed spending discipline in their third-quarter results out last week.
Meanwhile, U.S. rig counts have been falling and on Friday saw the biggest drop since May 2016, according to Baker Hughes (BHGE) data.
Oil Demand Keeps Rising
Global demand for crude is rising, and the International Energy Agency said last month that global supply and demand will balance next year as demand growth rises 1.4% in 2018.
Gasoline demand from China remains especially robust thanks to a 17% increase in SUV sales. And in the U.S., trucks and SUVs remain popular.
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