In the tank Oil prices surge ahead of Trump's Iran decision, hitting German business

The 20 DAX firms who have reported their first-quarter results so far have showed sales stagnating and pre-tax profit down 2 percent on average.
This thirsty steam cracker costs more to supply every day.

The surprising surge in oil prices is catching German companies at a bad time. Even as oil prices shoot past $75 a barrel on their way to $80, the Ifo business confidence index continued to fall in April, registering its fifth monthly decline in a row. Germany’s industrial output declined the first three months of the year as a stronger euro weakened foreign demand.

The roller-coaster oil prices has caught analysts flat-footed. As recently as a year ago, the extra supply from US shale production weighed on prices and led analysts to forecast moderate prices for 2018. But disciplined limits on production by OPEC countries and lower output for geopolitical reasons — the conflict in Syria, the collapse of the Venezuelan economy — restricted supply even as the global economy surged.

Now the prospect of renewed US sanctions against Iran, OPEC’s third-largest exporter, is also driving prices upward. Brent crude oil prices have risen 60 percent since last June, surpassing $75.

German flag-carrier Lufthansa is among the first to feel the impact and is forecasting a profit decline this year after three successive years of record earnings. Fuel costs are expected to rise by €600 million to €5.8 billion at current prices. A further 20 percent increase would add another €300 million to the bill.

08 p04 Brent oil price in $ per barrel-01

The 20 DAX firms who have reported their first-quarter results so far have showed sales stagnating and pre-tax profit down 2 percent on average. A higher euro has also dampened performance.

BASF is also forecasting lower profits for the year, largely due to the squeeze in margins as the higher oil price makes base chemicals more expensive. The impact is partially offset, however, as prospects improve for its specialty chemical division and for its oil and gas unit, Wintershall.

Still, economists aren’t saying the sky is falling — at least not yet. “The increase in crude oil prices is not a boost for the economy, but it’s also not a catastrophe,” said Ulrich Kater of DekaBank. But he added that an oil price approaching $90 a barrel would entail a downward revision of growth forecasts.

Marcel Fratzscher, head of the Cologne Economic Research Institute, said the overall economic uncertainty, especially the threat of a trade war, weighs more heavily on the economy than the rise in energy prices. There's a storm brewing for business, he said, but higher oil prices are just one factor among many.

Many of the risk factors for oil are already priced in, economists said. Nonetheless, if US President Donald Trump follows through on his threat to impose new sanctions on Iran this week and pull out of the nuclear accord, it could ratchet prices up even further.

Ulf Sommer and Matthias Streit cover financial markets and companies for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: [email protected] and [email protected].