Don’t Take Higher Oil Prices For Granted
Oil prices collapsed at the start of this week, with WTI and Brent dropping 5.5 percent and 7.5 percent respectively from their three and a half year peaks.
This recent price slump serves as a timely reminder for market observers and players alike that, while a heightened geopolitical risk premium and declining inventories have boosted prices, there is plenty of downside in today’s markets.
The prices started to fall when Saudi Arabia and Russia, two key brokers in the Vienna agreement, announced that they are ready to ramp up production to counter the threat of falling supply from Iran and Venezuela. The fear of a huge surge in U.S. shale production also played a part in sending oil prices lower, with rising U.S. exports to Asia beginning to impact the market share of both Russia and Saudi Arabia in the region.
Many already understand that this price rally is not sustainable. Vladimir Putin recently saidthat an oil price of $60 “suits Russia”. Last year, Russia’s finance minister shared his plans to draft the 2017-2019 budget based on oil prices as low as $40. These statements, taken alongside the recent reports that Russia and Saudi Arabia are looking to bring some production back online, have been seen by some as a sign that the recent oil price rally is coming to an end. It has long been known that these kind of production deals are not long term and sustainable solutions to an oil market crisis.
This is not to say that oil prices can’t rise again, or even touch $100 in the near future. Both the Iran nuclear deal and collapsing production in Venezuela could provide plenty of upside to oil prices.
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