Oil: US decision on Iran adds to price rally - Westpac

Crude oil prices have rallied strongly since mid-2017, boosted by strong global growth, supply struggling to keep up and aggressive speculative demand and this week’s decision by President Trump to withdraw the US from the 2015 Iran nuclear deal – predictable though it was – provided yet more ‘fuel’ to the rally, according to Sean Callow, Research Analyst at Westpac.

Key Quotes

“Both the global benchmark Brent crude and WTI reached highs since late 2014.”

“The oil price surge has mixed implications for policymakers. The cost of transport is rising, especially in the US where taxes are only a small portion of the price of a tank of gasoline (the benchmark unleaded price is already up 26% since June 2017). It is effectively a transfer of wealth from energy consumers to producers, just as 2014/15 was a sharp fall in costs for consumers.”

“Central banks struggling to meet inflation targets will welcome the boost to headline inflation rates. Japan CPI excluding fresh food and energy prices rose just 0.3%yr in March, while Eurozone core inflation slowed to 0.7%yr in April. The BoJ in particular has placed some of the blame for its failure to reach its 2% inflation target on the weakness of headline inflation, weighing on inflation expectations and thus wages.”

“The upswing in crude oil prices will support headline inflation globally for some time. It may be a long shot to expect a flow-on impact to wages and sustained inflation, but it certainly won’t hurt.”

“Yet the Fed remains fairly lonely among major central banks in its tightening path. In recent months, pricing for tighter policy has been wound back for the likes of the ECB, BoE, BoJ and RBA. Today the RBNZ even declared that its next move was as likely to be a cut as a hike. This global backdrop should keep providing the US dollar with underlying support from yield spreads, though it is not quite as compelling as in recent weeks.”