Oil is the most pervasive commodity in the modern global economy. Most end products used by people, companies and governments are in some way affected by the price of oil, either as a raw component or through the cost of energy, transportation and product distribution.
Geopolitical issues and the US/Iran nuclear deal will pull prices in opposite directions in the near-term. Ultimately, a fully rehabilitated Iran could help bring stable and relatively high oil prices. But the wait for agreement on Iran’s nuclear programmes may be long. In the meantime, the pressure on the oil price may well be downward. At some point, Saudi Arabia, Iran and some other producers will make commercial peace and defend a new equilibrium price. It will probably be below the $110 a barrel which prevailed from 2011 to mid-2014. But well above the minimum $30 per barrel needed to keep the world supplied for a long time.
The US Energy Information Administration (EIA) forecasts that WTI would average $52 a barrel in 2015 and $70 in 2016, which implies a trading range of $50-80 over the next eighteen months, which seems realistic. Between now and then, the deal must be fleshed out and put into effect. Iranian oil production must increase, and wasteful domestic consumption, estimated to be running at 50% of total production, must fall.
The cartel mentality may be re-established, possibly following a global outbreak of enlightened self-interest. Much more likely is a prolonged period of price-sapping competition for market share, until co-operation looks like the least bad way to proceed.
Commodities such as WTI Oil are Alternative Asset Classes. Oil prices do not necessarily move in tandem with the positive or negative momentum of the financial markets or in line with traditional asset classes like equities, bonds or property. This non-correlation means that adding an investment in Oil to an investment portfolio will result in greater portfolio balance and diversification. Investing in Oil not only provides the potential for capital growth but complements investments in other traditional asset classes by providing the potential to protect an investment portfolio from the inevitable volatility in financial markets in the medium to long term.