Nafta deal causes oil to jump
Published on 02.10.2018 22:55

The oil priced has continued to climb in today’s trading session after surging by more than 3 percent yesterday, marking a 4 year high on the back of a new NAFTA type deal signed between the US, Canada and Mexico.

The pact is the culmination of months of negotiation between the 3 countries and among other things, is expected to facilitate the sale of oil between them which investors took on board a positive move for the oil market which in turn drove prices higher.

Although an agreement was forged, the deal still has to pass the US congress and members of the petroleum industry are pleading with them to do so.

“We urge Congress to approve the USMCA,” said Mike Sommers, president and CEO of the American Petroleum Institute.

“Having Canada as a trading partner and a party to this agreement is critical for North American energy security and U.S. consumers. Retaining a trade agreement for North America will help ensure the U.S. energy revolution continues into the future.” He added.

Upcoming sanctions against Iran are still casting a shadow over the oil market and although Iran says it will not comply, and continue to export oil, the reality is they have already lost a significant amount of customers who are scrambling to comply with the upcoming US sanctions out of fear they may fall foul of the US government.

The market is “still turning a nervous eye towards Iranian production losses,” said Robbie Fraser, commodity analyst at Schneider Electric

“While official U.S. sanctions against Iranian oil exports are still just over a month away, Iran’s exports have already declined by at least 30% according to multiple estimates, as foreign buyers look elsewhere to source oil.” He added.

According to some, the new Nafta deal as well as the upcoming sanctions against Iran have made $100 a barrel oil a near certainty and this will be negative for the market, as it will create another bubble, and lead to the inevitable bust which defeats the original purpose to create long term stability in oil prices.

"It almost signaled a psychological panic-type buying," he told CNBC. "We're moving into a world where you have lower inventories, lower spare capacity, less protection for buyers, and this kind of sent a shot across the bow." John Driscoll, chief strategist at JTD Energy Securities

"This could trigger inflation. This could trigger substitution of other fuels for energy," Driscoll said. "It ultimately will have a long-term effect on demand. We'll be back into that cycle of boom-bust." He added.

 

The material published in on this page is produced by the FIBO group companies, and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC; furthermore it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Andrew Masters

Analyst

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