Oil: Prices could increase further - Nomura

Crude oil prices have increased more than $10/bbl this year, boosted by tensions in the Middle East and they could increase further following the Trump administration’s withdrawal from the Iran nuclear agreement, according to analysts at Nomura.

Key Quotes

“Although higher oil prices adversely affect the US outlook, the increases so far will likely have only very modest effects on growth, inflation and interest rates.”

“The Trump administration’s announced withdrawal from the Joint Comprehensive Plan of Action (JCPOA), better known as the Iran nuclear agreement, helped sustain elevated crude oil prices with WTI currently above $70/bbl. Continued tensions in the Middle East have the potential to keep crude oil prices elevated, or even push them higher, over the medium term.”

“Increasing crude oil prices affect the US economy primarily through two channels: putting downward pressure on consumption by reducing households’ non-energy disposable income; and increasing nonresidential fixed investment as oil-related investment activity picks up. Historically, the negative consumption response dominated the increase in oil investment. However, as US production, especially “unconventional” production, ramped up over the past decade, the investment response has played a more important role, offsetting a significant portion of the decline in consumption.”