A dramatic upswing in oil
prices over recent months could soon create a "particularly hostile
environment" for global investors, Citieconomists warned
The price of crude has risen
over the past two years, from $26 in 2016 to $77 on Monday, as the balance
between supply and demand has been steadily tightening. This has helped boost
company's profits too— with several oil and gas producers and
refiners among the biggest gainers on Wall Street over the past month.
However, President Donald Trump's decision to
pull the U.S. out of the Iran nuclear deal "constitutes a major
geopolitical shift" which could trigger a move in the direction of
"stagflation," a global strategy team at Citi, led by Mark Schofield,
said in a research note published Monday.
The combination of subdued
economic growth and rampant inflation — also known as stagflation —would likely
create a "particularly hostile environment for risk assets," the U.S.
Alongside a broader
escalation in regional conflict, Citi economists argued that a sustained
increase in oil prices and weaker-than-anticipated global
economic growth data could combine to heighten the risk for financial market
'All that is certain is
Last week, Trump vowed to
quit the landmark 2015 accord and promised to
re-impose sanctions on Iran. The contentious decision, which was
largely at odds with the international community, has stoked anxiety in the
Iran pumps approximately 4 percent of the world's oil, with the looming
prospect of American sanctions set to cut off some of that supply.
When sanctions were imposed
by the Barack Obama administration on Tehran in 2012, Iran's oil exports
dropped to approximately 1.5 million barrels per day (bpd). Since the export
restrictions were lifted in 2015, as part of the multilateral deal that offered
economic relief in exchange for curbs to Iran's nuclear program — formally
known as the Joint Comprehensive Plan of Action (JCPOA) — that figure increased
by more than 1 million.
President Donald Trump gives
a thumbs up while holding an umbrella in the rain as he arrives at Dallas Love
Field aboard Air Force One to address the National Rifle Association Convention
in Dallas, Texas U.S., May 4, 2018.
Most analysts predict the
impact on Iranian crude supply later this year will be more limited,
especially in comparison to Obama's 2012 sanctions — they say Trump could
reduce Iran's oil shipments by 300,000 to 500,000 bpd, far short of the 1
million to 1.5 million bpd that were cut from the market six years ago.
OPEC, Russia and several other allied
producers have spearheaded an ongoing effort to try to clear a global supply
overhang and prop up prices. The agreement, which came into effect in January
2017, has already been extended through until the end of this year — with
producers scheduled to meet in June to review policy.
"Is OPEC, possibly
together with its non-OPEC peers, going to fill the void potentially left in
global supply by Iran? Time will tell and until then, all that is certain is
volatility," Tamas Varga, analyst at PVM Oil Associates, said in a
research note published Monday.