Is $70 oil the new normal? – The global economy is poised to cope well even if oil prices will remain at around $70 per barrel throughout 2018, energy experts said – Dollars 70 barrel crude oil shale oil - Arhive

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Is $70 oil the new normal?

Surge in oil reflects the strength of the world economy and success of Opec’s strategy

The global economy is poised to cope well even if oil prices will remain at around $70 per barrel throughout 2018, energy experts said.

Dollars 70 barrel crude oil shale oil

According to latest projections by experts, oil will average $60 per barrel in 2018 and $61 per barrel in 2019. (Reuters)

Oil hit $71 a barrel on Thursday for the first time since 2014, supported by Opec-led supply curbs. It eased to $70.52 on Friday.

“Oil at $70 per barrel is not a threat to the global economy. We expect oil prices to fall back from their three-year high in the coming months due to increasing supply. But even if prices stayed around $70 per barrel, they would not endanger the global economy,” analysts at Oxford Economics said.

They argued that the $24 rise in price since mid-2017 has reflected the strength of the world economy as well as the extension to Opec’s deal to restrict output and various geopolitical tensions, including the recent civil unrest in Iran.

Experts believe high prices are likely to prove self-correcting by leading to an increase in supply, particularly in US shale, and by undermining Opec compliance with its output quotas.

“As such, we think the price of Brent will end the year at around $55 per barrel,” said analysts at Oxford Economics.

Reflecting the global trend, the UAE Ministry of Energy increased fuel prices for the month of February.

According to latest projections by experts, oil will average $60 per barrel in 2018 and $61 per barrel in 2019. That’s an increase from last month’s short-term energy outlook by the US Energy Information Administration. The EIA forecast that WTI oil would cost $58 per barrel in December 2018.

Francisco Blanch, head of commodities and derivatives research at Bank of America Merrill Lynch, said given a drop in inventories, oil prices will likely be higher in 2018 than originally expected.

“We now project an average Brent crude oil price of $64 per barrel in 2018, compared to $56 per barrel prior. Put differently, we now expect Brent crude oil prices to increase $9 per barrel or 17 per cent above last year in 2018.”

“Should prices rise from there, US shale oil supply could shoot up higher. Oil demand could get hurt. So Opec and Russia would probably be better off by signaling a gradual approach or a ‘tapering’ of sorts,” said BofA Merrill Lynch.

“As prices rise, the focus could soon turn to how Opec and the non-Opec deal participants will unwind the production cuts that were agreed to in December 2016. After all, rising prices could soon incentivise elastic US shale supply to come back into the market at an accelerating rate. In that regard, we present three possible scenarios for the Opec plus Russia alliance to unfold. A first option is that the deal is extended through 2019 or beyond. A second option is that the deal is unwound gradually and the Opec exerts some discipline with only modest increases in supply. A third possibility is a return to another market share war between Russia and the cartel members,” said BofA Merrill Lynch.

Ole Hansen is head of commodity strategy at Saxo Bank, said crude oil continued higher as it found support from dollar weakness, supportive comments from Saudi Arabia and Russia and a continued reduction in US crude oil stocks. He said the rally only paused after both WTI and Brent crude oil managed to recover half of what was lost during the 2014 to 2016 selloff.

“A weaker dollar still combined with renewed geopolitical risks (of which we have had plenty during the second half of 2017) are likely to be the key sources of support that could upset our call for lower prices during the first quarter of 2018.

“In the short term, the recent highs at $65 in WTI and $70 in Brent crude will offer support while a break could signal the potential beginning of a correction phase,” Hansen said.

Majid Jafar, CEO of Crescent Petroleum, said there is an unprecedented coordination, not just from within Opec, but with non-Opec, and that seems to be continuing.

“We’re almost $70. We could be up to $80, but the concern is, a shock like Venezuela, one country, with a major outage of production, could see a shock to prices, and, over the next few years, because of the huge underinvestment we had over the last few years, the concern is, as global growth continues, and the balance happens in the market, you could see a shock upwards on oil prices.”

In December, 2017, oil prices hit a 30-month high. Prices averaged $64 per barrel, the highest monthly average since 2014. Traders responded to the November 30, 2017, Opec meeting where members agreed to keep production cuts through 2018.

Oil prices are almost triple the 13-year low of $26.55 per barrel on January 20, 2016. Six months before that, oil had been $60 per barrel (June 2015). A year earlier, it had been $100.26 per barrel (June 2014). Today’s oil price changes daily.

The price of a barrel of West Texas Intermediate oil is $4/b lower than Brent North Sea oil prices. In December 2015, the difference fell to just $2/b when Congress removed the 40-year ban on exports.

By 2025, the average price of a barrel of Brent crude oil will rise to $86/b (in 2016 dollars, which removes the effect of inflation). By 2030, world demand will driving oil prices to $95/b. By 2040, prices will be $109/b (again in 2016 dollars). By then, the cheap sources of oil will have been exhausted, making it more expensive to extract oil. By 2050, oil prices will be $117 per barrel, according to the EIA.

By 2026, the US will become a net energy exporter. It has been an energy importer since 1953. Oil production will rise until 2030, when shale oil production will slow. US oil production will decline slightly through 2050, said the report.

-issacjohn@khaleejtimes.com

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