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Oil hits record $70 per barrel

Venezuelan economic crisis, Iran concerns and overall strong US economy all contributing factors pushing crude to four-year high

The news for the economy appears “positive” as a combination of a strong American economy and the worries over Iran and the Venezuelan economic crisis together pushed crude oil prices through the $70 mark for the first time since November of 2014.

This sort of positivity is mainly in the energy market, of course. Higher oil prices often translate to higher prices at the gas pump for most Americans. However, this increase is not a sharp one; it has been very gradual and incremental, so this probably does not portend an episode of sticker shock as the American driving season gets fully underway.

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The overall markets opened higher in Europe, influenced by several factors. A holiday closure in London thinned early week trading, and the aforementioned rise in energy concerns combined with positive earnings updates. The rise was not limited to the energy sector, as more mundane companies such as Nestle also gained on the decision to pay Starbucks over $7 billion in cash for the rights to sell the US chain’s coffee products around the world.

The cause for the rise in prices appears to be centered on concern over the OPEC member state Venezuela. This country is currently in an extremely difficult economic crisis, and its whole economy is essentially based on oil. In an effort to resolve their crisis, Venezuela is threatening to lower its production and exports of oil, which tends to force the overall price higher.

Similarly, the political waves caused by uncertainty over the future of the US participation in the 5+1 nation agreement with Iran regarding its nuclear energy and weapons development programs. The US President gave a May 12 deadline to at least begin to fix the Joint Comprehensive Plan of Actionon the basis that there are significant problems with the deal.

The President warned that if measures were not undertaken to remedy the problems with the deal, the US would withdraw from it, and that it would refuse to extend the sanctions relief this agreement provides to the oil-producing country. However, at this time, so far, Germany and France have vowed to remain participants in the deal even if the US pulls out. It would appear that this issue, while of concern, is far from any matter of dire emergency, but it is having an effect on crude prices.

The price increase in crude would be expected to boost the value of Russian currency, but the effect has actually been very slight thus far in May, as the US dollar also got stronger in the same period. The ruble is still trading in the 62 ruble-per-dollar range, a level which has been the rule of the day since the start of the recent Syrian crisis on 9 April.

The cause for the dollar’s strength is reported to be sourced in investor speculation on further Fed rate hikes and on further strength of the American economy, which has been doing quite well for the last 18 months or so.

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The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Duran.

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