Oil prices rose to their highest levels since 2014 this week. U.S. crude, measured by the price of West Texas Intermediate (WTI), climbed to $75 per barrel. Brent crude, the international measure of oil prices, is now at more than $84 per barrel. There are several reasons for the increase in energy prices in 2018, both from the supply and the demand side. At a broad level, the return to slightly higher oil prices is a relatively good thing for the financial markets, both in the U.S. and globally.
From a demand perspective, the global economy has been growing—and with it the demand for oil. The International Energy Agency (IEA) estimates that the global economy requires 1.4 million more barrels per day of oil in 2018, relative to last year. The IEA also estimates this number growing to 1.5 million barrels per day in 2019.
The supply of oil has also been reduced this year. Most importantly, OPEC has continued on its course to reduce oil supply by its producers. Beyond the OPEC cuts, Venezuela has been a big reason for lower oil supplies this year. Venezuela’s oil output, mostly due to government interference and mismanagement, is down by nearly 1 million barrels per day this year. The U.S. has also announced renewed sanctions on Iran, beginning in November. These sanctions are also expected to take off several hundred thousand barrels per day of Iranian crude oil.
A rebound in energy prices is not necessarily a bad thing. Due to fracking and advances in drilling technology, the U.S. is now one of the biggest energy producers in the world. Maintaining an oil price that is supportive of our domestic energy industry will provide a nice tailwind to the U.S. economy, and the financial markets. Indeed, there is a “sweet spot” of energy prices that will support greater economic growth, while not becoming too expensive for the consumer. A long-term worry would be that oil prices rise too fast, and U.S. consumers are penalized by much higher gasoline prices at the pump.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.