Already, the recent sanctions have caused Iran’s production to drop. According to an OPEC report, Iranian output fell to 3.35 million barrels in March from 3.46 million in January.
Iran seems to be “playing nice,” meeting with six world powers, including the U.S., England, Germany and Russia this past week. While the results of those talks won’t fully be digested until the group reconvenes at the end of May, analysts have already speculated that if worries about Iran disappear, oil will drop lower — to the previously mentioned $80-to-$85 range.
I wouldn’t hold my breath waiting for that to happen.
Political instability in the Middle East will continue to be major problem. Before the recent Iran issues, it was Libya. Before Libya, it was Egypt. Other uncertainties focus on civil unrest in Yemen and discord between Sudan and South Sudan.
Meanwhile, Syria continues to erupt into violence, and Tunisia has stated its support for Iran’s positions on nuclear power and the Strait of Hormuz. The latest blow could be Egypt’s decision to halt a natural gas supply agreement with Israel, which could fuel Middle East geopolitical tensions. Israel’s Finance Ministry said the nation views “the termination with great concern and warned that the step could damage peace agreements between the countries.”
And here in the U.S., poor infrastructure is preventing that glut of oil from reaching critical refiners. While there are plenty of proposals for new pipelines and reversals of flows, adding capacity takes months, if not years, to complete.
Even accessing that glut could still result in higher prices. Enbridge’s (NYSE:ENB) planned Seaway Pipeline reversal and TransCanada’s (NYSE:TRP) expansion of the Keystone XL pipeline could see WTI prices converging on Brent as WTI once again becomes a world benchmark.
Already, the spread between the two standards has decreased simply on the news that these pipelines are planned and currently sits at around $16. That’s the lowest that spread has been since February — and far below the record of $26 reached in August.
So while an end to Iranian tensions should allow prices to dip in the short term, there are plenty of reasons why they’re sure to move higher again down the road. Political instability in the Middle East will remain a price-boosting issue, most likely for years to come.
Rising production costs due the industry’s increased reliance on unconventional sources of supply and growing global demand will also keep WTI prices relatively high for the reasonable future. Odds are we won’t see $145-per-barrel crude anytime soon, but the $100-to-$110 range is certainly doable.
I’ve written several times about the importance of having energy investments in one’s portfolio. My favorite funds in this sector continue to be the equal-weighted SPDR S&P Oil & Gas Equipment & Services (NYSE:XES), the broad and cheap Vanguard Energy ETF (NYSE:VDE) and U.S.-focused iShares Dow Jones US Energy (NYSE:IYE). These funds have all the necessary characteristics of long-term winners.
Pairing any of them with one of the major pipeline companies, such as Enbridge or Kinder Morgan (NYSE:KMI), would make an ideal way to play oil’s new price floor and rising global demand.
Aaron Levitt is long XES.