The oil market remains volatile. The supply is on the tight side and that makes the market nervous. Two geopolitical developments are also closely monitored by traders and analysts.
On Monday, February 14, the price of Brent oil took a big step upwards, to $95,61 per barrel. That is more than $4 higher than on Thursday earlier. However, this revival is short-lived. On Friday, February 18, that increase was completely lost and Brent oil was quoted at $91,34 per barrel. The significant price movements are largely caused by two developments in international politics.
On the one hand, there is the threat of a Russian invasion of Ukraine. The Kremlin did announce that it would withdraw some of its troops. The NATO and Ukrainian governments, among others, report seeing no retreating movement of the Russian army. US President Joe Biden went a step further on Wednesday by saying that an invasion of Ukraine 'remains very possible'. The threat of war and the sanctions that hang over the market as a result have a driving effect on oil prices. Russia is an important supplier of oil not only to Europe and Asia, but also to the United States.
Will Iran return to the market?
Negotiations with Iran on the nuclear deal are approaching their final phase and this is having a downward effect on prices on the market. The Joint Comprehensive Plan of Action, the agreement between Iran, the five permanent members of the United Nations Security Council, Germany and the European Union, entered into force in 2015. The United States withdrew from the deal in 2018. In short, American sanctions against countries that trade with Iran became active again. Since President Biden took office, attempts have been made to revive the deal. Josep Borrell Fontelles, representative of the European Commission's common foreign and security policy, tweeted on Monday that "an agreement is within reach."
If the negotiations are successful, sanctions on Iran's oil exports are likely to be lifted. According to the International Energy Agency, this means that 1,3 billion barrels of Iranian oil enter the international market every day. The race in negotiations is not yet over. There is resistance to the deal, especially in the United States. However, the United States is experiencing rising inflation, partly due to sharply increased energy costs. Increasing global oil production can ease that pain, but that will not work. In that sense, lifting sanctions against Iran could be a logical step, according to several analysts.
Little investment
The fact that, despite the fact that the oil quotation is at the highest level in eight years, there is hardly any additional investment in the oil industry is something that specialists are concerned about. It is understandable that oil companies are being cautious. Emission allowances, the Green Deal and increasingly strict environmental requirements make companies cautious about making large investments that will only pay off in the long term. This also deters financiers. Under pressure from the environmental movement and politics, the European oil companies in particular are forced to invest a significant part of their budget in non-fossil projects.
It is also not necessary for share holders to invest in new sources. Several companies have discovered that buying up their own shares (to maintain the price) and paying out the remaining profits as dividends (instead of reinvesting) makes shareholders satisfied. However, several experts are surprised that (now that the oil price is relatively high and many companies are showing good operating results) no more investments are being made in new sources to secure production for the future.