The fate of Polish drivers in Trump’s hands

May 7, 2018 4:50 PM|Marcin Lipka

"President Donald Trump is to decide by Saturday whether the Americans will continue to participate in the nuclear agreement with Iran. If the White House withdraws, Poles may face further price increases at petrol stations," writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk

Since mid-March, there have been two instances of strong increases in fuel prices. The first one was a result of higher crude oil prices in global markets. The second was connected with the zloty weakening and dollar strengthening.

Although the effect related to the currency market is not yet fully calculated in prices, according to the European Commission, one litre of diesel cost 4.80 PLN in Poland at the end of April and was the most expensive since November 2014. Lead-free petrol, in turn, reached the level of 4.88 PLN/litre, which is the highest level since July 2015. Unfortunately, this is not the end of bad news. We may face the third wave of price rises and the prospect of refuelling for well above 5 PLN per litre.

Strong demand and uncertain supply

The second week of May began with further increases in oil prices. Brent oil has exceeded 75 USD and reached its highest levels since the end of 2014.

A further decline in production from Venezuela is a fundamental threat. According to the International Energy Agency (IEA) report in April, extraction from that country could fall to 1.38 million barrels per day (bbl/d). This would be the least since the 1940s and 1 million bbl/d below levels from 2 years ago.

At the OPEC meeting next month, the agreement to limit production may be extended to 2019 as well. The increasingly close relationship between the Cartel and Russia and the effectiveness of raising oil prices may result in the cooperation formalising for an indefinite period of time. This would be a negative message for consumers.

It is also worth remembering that this year the demand for oil is expected to increase by approximately 1.5 million bbl/d. On the other hand, a higher supply is to be ensured mainly by the United States (1.3 million bbl/d). With declining global oil stocks and strong demand growth, there is a risk that if production growth in the US slows down, the oil market deficit could widen sharply. This may sustain prices in the coming weeks.

Iranian agreement at risk

The medium-term elements supporting the rise in oil prices in the coming days will give way to one event. Until 12th May, President Trump has to decide whether to continue to participate in the nuclear agreement with Iran concluded in 2015. Today, there are many indications that the US will again impose sanctions on Tehran.

This would probably have wide-ranging consequences in the oil market. Over the next few months, supply from Iran could decrease by several hundred thousand barrels per day due to the difficult cooperation with Iran, even for companies outside the USA.

According to the Congressional Research Service (CRS) non-partisan report "Options to Cease Implementing the Iran Nuclear Agreement" from late April the entire agreement could fall apart (apart from the United States, other participants include Germany, the United Kingdom, Russia, China and France), if the USA withdrew from it and Iran returned to their research on nuclear weapon production.

Another consequence of the agreement ending, according to the CRS, could be Saudi Arabia's willingness to own nuclear weapons in order to reduce the hypothetical impact of Iran's production. One more negative affect for the oil-rich region could be the economic crisis in Iran linked to sanctions. This carries an increased risk of destabilising the internal situation in Iran and the Middle East as a whole and therefore, increasing the price of oil.

It will be more and more expensive

If there is no agreement extension with Iran, the baseline scenario is a further increase in oil prices and the Brent overrun of USD 80 per barrel. This would result in a further increase of prices at Polish petrol stations by a dozen or so groszy.

In addition, concerns about the power balance in the Middle East and the growing risk of supply disruptions in the region could keep prices high for much longer than would be the case solely because of fundamental factors.

May 7, 2018 4:50 PM|Marcin Lipka

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