Why Did the Oil Prices Spike 13% in One Week


What will you call a man who first grumbles about higher oil prices and then cause a rally ithis own actions? Yes, Trump. WTI touched $74, highest since 2014. Brent rallied too settling at $78 at one point. The bulls are back and they have all the reasons to be. As the market weighs in different factors, here are the reasons that caused this recent price spike.

By giving a November ultimatum to the oil companies to reduce their imports from Iran to zero without any waivers or exceptions Trump has caused oil prices to rally-up 13% in the past week. Albeit there was a mix of other factors this geopolitical wildcard, as it is called, was the major reason.

The news from Libya is not very good too. There have been some outages from the Libyan oil ports. The fear of supply outages form the country still takes hold.Canada also suffered from some internal issues. Due to a power outage at Syncrude facility it has been temporarily shut-down taking out almost 360,000 bpd off the markets. The facility is expected to remain shut-down through July.

Then there was the 22nd June meeting between OPEC and NOPEC members reviewing the Vienna agreement that was signed in November 2016 in the wake of falling oil prices.The result of the meeting has been termed vague. The matters for increase in supply and the quotas for different countries are still not clear. After the meeting oil prices, surprisingly, surged as traders shunned the idea that a 1 million barrel increase in production would flood the markets. There were other issues at play as well. The Venezuelan crisis where production has collapsed by more than 1 mbpd.

The news of the highest withdraw since September 2016, of a whopping 9.9 million barrels from U.S. inventories as reported by Energy Information Administration, last week was another major bullish news for WTI and resulted in almost more than 3% increase.Analysts had expected a modest withdraw of 2.5 million barrels.

Comes in Trump with his ever-whimsical disposition which he has inculcated very well in policy making and announced November 4 deadline for all oil companies to stop buying crude form Iran or face the music. There were no waivers like there were in the time of Obama. The imports had to be reduced to zero. Japanese, European and many other companies have already started to pull themselves away from Iran. France’s Total is going to leave South Pars project, the biggest project by any international company.

Iran, ever since William D’Arcy bought the oil concession, has been one of the most important countries. When it comes to oil the significance multiplies. Starting from the repudiation of Joint Comprehensive Plan of Action (JCPOA), or better known as, Iran deal, and all the way to sanctions; the implications go beyond economics and oil. Regional balance of power is at stake. So is the country’s future. So is the region’s. There are many stakeholders here. The possibilities are many.

Bank of America recently said that oil prices can touch $90. In the short-term it might. However, we have to wait. As the sanctions goes into effect, the response from China and India, Iran’s largest oil consumers will be of great importance. China has hinted that she might not consider the ban and continue buying Iranian oil. So will India as “India does not recognize unilateral sanctions, but only sanctions by the United Nations,” quoted an article on CNNmoney.

However, the bulls are calling for new highs. In the coming weeks the markets will be mostly sentiment driven. How traders and market observers will interpret the news will have an effect on the prices. We should also not forget the inventory reports and production figures from U.S. and OPEC producers. Any unexpected mix of these might result in prices going south again.

In latest development, as if to offset the effects of his actions, Trump has said that he had talked with MbS and “received insurances” to increase the production by 200,000 bpd. Saudi Arabia, albeit acknowledged the call but didn’t disclose any details regarding the production figures. Get ready for some sentimental shifts in the market in the coming days. But then today (Sunday) White House has backed off the tweet.

In any case the reasons described above caused the 13% increase in oil prices past week. It means we have to keep a keen eye on them.

Osama Rizvi
Osama Rizvi
Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.


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