It has long been the case that new – and sometimes controversial – ways of drilling have threatened to bring down the price of crude oil structurally and permanently. However, it is also often true that nations blessed with rich natural resources tend to be relatively unstable jurisdictions, making them more likely to make their presence felt via geopolitical price distortions.

There is little doubt that improving technology, resulting in a lower break-even cost of production, has benefited alternative means of drilling oil such as fracking in recent years; however, environmental considerations, which have attracted increasing scrutiny, have sometimes stood in the way of these methods being employed more widely. Furthermore, supply disruptions in certain areas, sometimes for operational reasons but more commonly owing to political machinations, have played their part in maintaining prices at a firm level.

Tightness in the Market to Remain

Currently, prices should be supported by Venezuelan production continuing to fall as the country’s crumbling infrastructure deteriorates further. Meanwhile, U.S. sanctions imposed against Iran have now been copied by many European corporations, given fear of U.S. retribution towards those not following suit. We believe this will add to the tightness of the overall global crude market. Moreover, specific delays at the field level, some of them significant, mean that traditional methods of drilling oil could actually decline over the next few years.

Of course, some of the larger OPEC (Organization of the Petroleum Exporting Countries) nations, such as Russia and Saudi Arabia, could be tempted to restart idle capacity, but they may be unwilling to sacrifice the hard-won equilibrium presently in the market. It seems that current oil prices represent something of a balance between economic relief for these countries and the danger of prices rising too high, which would destroy demand. Continued U.S.-dollar strength could also represent a headwind to prices rising higher.

All things considered, we would expect the price of crude to remain within the current range, albeit with some degree of volatility and notwithstanding significant geopolitical events or military action.

The Price of Brent Crude Oil per Barrel over One Year to September 19, 2018 (U.S. dollars)

Source: Bloomberg, September 19, 2018

Important information

This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.

‘Newton’ and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited and Newton Investment Management (North America) Limited (NIMNA Ltd). In the UK, NIMNA Ltd is authorized and regulated by the Financial Conduct Authority in the conduct of investment business and is a wholly owned subsidiary of The Bank of New York Mellon Corporation. Registered in England no. 2675952. NIMNA Ltd is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. NIMNA Ltd’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the website or obtained upon request.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of MBSC Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of MBSC Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including NIMNA Ltd.

Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved.