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How sustainable are high oil prices?
There are some downside risks for high oil prices in 2018 and beyond. First of all is the supply side.
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OPEC and non-OPEC countries together created a floor of oil prices. (shutterstock/-)
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ll major macroeconomic indicators — growth, unemployment, and inflation — suggest that 2017 will be the United States’ economy’s best year in a decade. And the US, together with other major global economies, is enjoying broad, synchronized growth beyond any expectations.
As a result, oil producers are becoming increasingly hopeful that the recent impressive price recovery will continue. There are some factors affecting the current increasing oil prices of which stakeholders of oil and gas should take into deep consideration.
Just over three years ago, Brent crude oil was traded more than US$109 per barrel. But by early 2016, oil prices had experienced a free fall, touching $33 per barrel.
The plummeting prices resulted from a combination of sluggish demand, alternative supply of fuel, particularly shale gas from the US, and a new OPEC production paradigm under which the cartel, led by Saudi Arabia, withdrew from acting as a swing producer.
As a result of collapse in export receipts and budget revenues, OPEC adopted a new approach by modernizing a production agreement with two key features: greater flexibility for countries facing especially complex internal conditions, such as Libya, and the inclusion of non-OPEC producers, particularly Russia.
OPEC and non-OPEC countries together created a floor of oil prices. With the pickup in global growth and the emergence of geopolitical uncertainties, oil prices rebounded to above $60 per barrel in the beginning of 2018. Oil prices in 2018 can reach $80 a barrel.
The recent global economic development is particularly beneficial not only for the price of oil, but also for the price of other commodities, because it is real, synchronized, self-reinforcing and increasingly so.
