Oil soars to three-and-a-half-year high

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oil prices shot up

Oil prices are creeping up and up amid escalating geopolitical tensions in the Middle East and beyond. Today, Brent crude oil prices shot up to their highest levels since November 2014, briefly breaking through the $80-a-barrel mark.

The fallout from US President Donald Trump’s decision to pull out of the Iran nuclear deal and impose trade sanctions on the Islamic Republic has begun in earnest. In a day of dramatic news, it’s become clear that a tense push and pull between the US and its European allies about Iran’s place in the international market is emerging.

Oil has been hovering close to the $80 mark all week. However, the factor that finally pushed it over was French energy company Total’s announcement that it will cease operations in Iran before the end of this year, unless it is granted an exemption from sanctions. Total is the first casualty of Trump’s trade sanctions, but it’s unlikely to be the last. Despite the European allies’ firm commitment to the nuclear deal, they can’t stop private companies prioritising their interests in the US.

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Total already has some symbolic status in the Iranian oil landscape, as it was the first major Western energy company to establish itself in the country following the lifting of sanctions in 2015. Now, it looks like it might also lead a widespread withdrawal as companies decline to risk losing their access to the US. A second company, shipping giant Moller-Maersk, also announced today that they plan to withdraw from Iran.

Other companies seem ready to step in and take their place, however. News has broken that a British consortium called Pergas has signed a deal to develop an oil field in South Iran. It plans an eventual daily output of 200,000 barrels of crude oil and seemingly has no intention of operating in the US concurrently.

Iran generates roughly 2.4 million barrels daily, amounting to about 4% of the world’s supply. Concerns about the global oil supply also have been intensified by the recent news from the US Energy Information Administration that the US oil inventory dropped by 1.4 million barrels last week – this is likely to push prices even higher across the market.

There’s an unsurprisingly bullish tone to today’s financial commentary. A representative from Morgan Stanley forecasts that Brent may trade for as much as $90 a barrel by 2020. Not to be outdone, Bank of America Merrill Lynch and Total’s own CEOs have both predicted that the price could go as high as $100 in the coming months, due to potential supply constraints in Iran and politically-instable Venezuela.

High oil prices generally have a knock-on effect on the global economy as inflation increases and consumer spending drops. Saudi Arabia and Russia might be able to release more barrels to balance a shortage from Iranian distributors, but it seems likely that prices will continue to rise on the expectation of diminished supply.

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