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The Persistence of Oil Price Pressures

Oil prices have continued to move up in 2018 (see chart), as a looming November 4th deadline is slowing Iranian oil exports. Starting November 4th, the U.S. has said it will impose sanctions on countries or companies that buy oil from Iran. This has already caused a large drop in oil purchases from Iran.

With spare capacity for production very low globally, cutting out Iran’s production is putting meaningful pressure on oil prices. Coupled with the deteriorating situation in Venezuela, a key oil producer, oil supply could shrink significantly further, which could lead to even higher prices. While market predictions are currently calling for oil to stay around $70 a barrel in 2019, energy experts believe oil prices could shoot to $100 or above in 2019 if supply drops more than expected.

While Saudi Arabia and some other members of the oil cartel OPEC could potentially increase their production to make up for the production drop, they have indicated a reluctance to do so.

Higher oil prices have already pushed gas prices to their highest levels since 2014 and could contribute to higher inflation worldwide. In turn, meaningfully higher inflation would also make the case for continued interest rate increases.

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