Nearly two months ago, when the Brent price was about $64 (Dh235) a barrel, I said the hopes of those who thought prices would shoot over $70 were dashed as the rally proved to be unsustainable. That statement did not stand the test of time as Brent has been persistently above $70 since April 10.

My view at the time was governed by the prevailing circumstances and was actually the view shared by a great majority of observers. The IEA at the time said “the underlying oil market fundamentals in the early part of 2018 look less supportive for prices”. But the oil market never fails to surprise and as circumstances changed, so did the path of prices.

Opec and associated non-Opec producers are supposed to review their agreement to curtail production by 1.8 million barrels a day (mbd) in June, which gave the impression they may exit the agreement by the end of 2018 or even earlier. This is not on the cards and some are talking of some extension beyond 2018. The agreement is holding well above expectations judging by the compliance from all countries.

There were doubts about oil stocks in the first quarter and some even anticipated it to build up. This did not happen. Overall oil stocks in the OECD countries in January were about 380 million barrels above the five-year average indicator.

By the end of February, the stocks were only 30 million barrels above the said average. Libya and Nigeria did not increase their production and Venezuelan circumstances are forcing reduction in production. There is even a production decline in Angola due to ageing oilfields.

No surprise then that Opec’s production is well below the agreed level.

On the fundamentals side, the growth in oil demand in 2018 is estimated by Opec and IEA at 1.63-mbd and 1.5-mbd, respectively. Strong by all standards even though non-Opec supplies are estimated to increase by close to 1.8-mbd by the two organisations. All the above positives may not have been sufficient to push oil prices by $10 a barrel above the previously expected price range.

The uncertain geopolitical situation in the Middle East is contributing to a relatively overheating market. The Western powers’ strike on Syria, the continued war in Yemen, and above all the increased confrontation between Iran and the US with respect to the nuclear deal. The situation in Syria and Yemen may have been restricted to the two countries, but it is not impossible to imagine a situation where others may be involved in a region of great importance to oil supplies.

The oil market is already anticipating that the Trump administration is bent on abandoning the nuclear deal with Iran and re-imposing sanctions that will adversely affect Iran’s oil exports. The impact may affect 0.5-mbd of Iranian exports if the sanctions are strictly the US’s. But it could go up to 2-mbd if Europeans are opposed or reluctant to join the sanctions.

In this case, “the potential for a price spike grows significantly”.

In his recent visit to the US, the French President Macron spared no effort to convince Trump not to abandon the deal, but to seek a new deal through negotiations. The conditions are expected to be vehemently refused by the Iranians as they may involve an extension of the current deal beyond 2025, a halt to ballistic missile development and “some sort of limit on Iran’s geopolitical influence in the region”.

This presumed flexibility on a “potential new deal” contributed to a decline of prices on May 1 by over $1.5 a barrel before recovering partially. As I write, the price is $73.66 a barrel, a level similar to four years ago.

As we approach the Opec meeting in June, one has to remember the potential downside to oil prices. A softer stand by the US would at least temporarily send oil prices southward. The current surge in the US output may bring its production to 11.44-mbd next year. The US crude exports are now a reality and at a record high of 2.3-mbd.

The rising expectation of a US trade war with China is expected to impact world economic growth, and hence demand for oil and prices may fall accordingly. Forecasters are therefore cautious and the World Bank recently expected oil prices to average $65 a barrel this year, which converges with the EIA forecast as well.

It is incumbent on Opec and its associate non-Opec producers to reassure the market of their resolve by supporting the current agreement and avoid any talk of “exit” until prices recover to a sufficiently stable level.