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Brent rose to USD 80 a barrel – the highest level since 2014 – on concerns that the US sanctions on Iran will further strain supply conditions, even though the European Union is unlikely to follow the US in re-imposing the sanctions, suggests the research team at Rabobank.

Key Quotes

“The spread between Brent and WTI widened to almost USD 8. In April, Saudi Arabia signalled that it needed 80 dollar oil to pay for the government’s ambitious policy agenda and to support the pre-IPO valuation of Saudi Aramco. That target has now been reached. An even higher price would put further pressure on the OPEC’s production-cut deal, although it has to be said that the cartel’s cohesion is remarkable at this stage.”

“At these prices, oil seems to have really passed the sweet spot though. Sure, exporters enjoy a windfall, but consumer nations get hurt. Non-oil producing emerging markets will see the pressure on their current accounts increasing which is only being exacerbated by rising US rates. Also for the US itself, even though it is close to the tipping point between being a net oil importer or an exporter, oil prices at current levels are likely to be a bigger drag on consumption than they are a boon to business investment.”

“The recent rise in oil prices will also add to global inflationary pressures, even though the pass-through from oil prices to in particular core inflation is less than it used to be.”