PIMCO: Oil Hits Multiyear Highs on Renewed Iran Sanctions: What Investors Should Watch

October 11, 2018

By Greg Sharenow, Portfolio Manager, PIMCO

Renewed U.S. sanctions on Iran have lifted oil prices to multiyear highs. And while we believe investors can expect a hawkish policy stance to keep supporting prices, the possible extension of waivers presents a downside risk.

Brent crude oil settled at a high of $86.30 per barrel (bbl) last week, the highest level since late 2014, when OPEC elected not to cut output to fend off a growing market imbalance (see chart). The rally in oil, which is up nearly $20/bbl year-to-date, is particularly notable given the strengthening U.S. dollar and weakening of most other commodity markets, most notably base metals. Crude oil’s outperformance is attributable primarily to geopolitical factors, namely the continued decline in Venezuelan output and the now-declining exports from Iran. These output losses have more than offset any concerns over slowing global economic activity (in part due to escalating trade tensions) and accelerating U.S. domestic crude and natural gas liquid output.

Higher long-dated prices reflect capacity concernsWhile Russia and key OPEC producers, such as Saudi Arabia, have increased output to help offset the decline in Iranian exports, the response has not been sufficient to quell the price rally