Is it time to talk about setting a floor to global oil prices, which are languishing at abysmally lower levels for quite a longer period? While it, surely, is too early to talk about a sustained recovery, some budding offshoots of optimism in the market can’t just help being noticed.
Oil prices jumped on Monday with the Brent hitting its highest level since December, up $2.12, or 5.5%, to settle above $40.84 a barrel, while US crude rose $1.98, or 5.5%, to $37.90. Prices have risen more than 40% since the 12-year lows hit two months ago.
There is an increasing hope that members of the Organisation of Petroleum Exporting Countries (Opec) along with non-Opec producers may be moving toward a consensus to support prices in an oversupplied market. Latin American oil producers are meeting on Friday to co-ordinate a strategy to support prices, while the UAE’s energy minister said on Monday current prices are forcing all suppliers to freeze their production.
In a sign of the slowly rising optimism of sustained demand, Saudi Arabia, the world’s biggest oil exporter, last week lifted the official selling price of its benchmark crude to Asian customers. Subsequently, Opec-member Iran raised prices for most of its oil grades for Europe and Asia.
Interestingly, a lot has happened since Goldman Sachs made the forecast of oil sinking to $20 (some doomsday views went as low as $10) a month ago. Some US shale drillers have said they’ll pump less in 2016, while Saudi Arabia, Russia and other large producers have frozen output and plan to meet later this month to discuss further measures to support prices. Hedge funds have unwound bearish bets at the fastest pace in 10 months as fear of oil sinking to $20 a barrel faded. Major Opec producers are now privately starting to talk about a new equilibrium of $50 a barrel, adding to signs that the market’s long, deep rout is officially over, says Gary Ross, one of the industry’s leading prognosticators.
Make no mistake; it still is not a rosy path of steady recovery for the oil market. The bear camp with a “lower-for-longer-oil” view has a host of disheartening scenarios to cement their positions: Oversupplies estimated above 2mn barrels per day; global stockpiles of more than 3bn barrels; lower demand growth forecasts for 2016; the dollar staying strong to make imported oil costlier; extra Iranian barrels flooding the market; US shale producers pouncing back at $50 oil; hard landing in major consumer China and the like.
Energy bulls apparently have made bad wagers on the $100-crude (oil hit an all-time peak of $147.27 on July 11, 2008) staying there for long. Bears may now be repeating the mistake of betting on prices staying woefully low even longer. In either case, ruthless betting to profit, with no focus on fundamentals to invest, doesn’t augur well for oil market equilibrium.
The Big Oil still envisages a future to price in energy demand and population growth, making oil an important fuel for decades to come.