At $75 a barrel, oil hits its 'Goldilocks' level. Someone tell Trump
Brent crude is back at the $75 a barrel level many analysts regard as the “Goldilocks” price: not too hot for the big consumers in China, India and Europe, but not too cold for the national treasuries of the Gulf countries and Russia. And it’s certainly not too soft a price for the shale men of the USA.
In fact, virtually the only person complaining about oil’s recent high is Donald Trump, who in a tweet last week said crude at current prices was “artificially Very High!” Such an utterance, even by Trump-tweet standards, sets a new low in levels of understanding of real world economics.
The oil executives who drill the Permian basin in Texas — some of Trump’s staunchest supporters — love oil at $75 a barrel. At that price, they can fund ongoing expansion in the shale fields of the USA without attracting every trailer-toting roughneck with a rig. At $75 a barrel, the US will become the biggest producer of oil sometime this year, leapfrogging both Russia and Saudi Arabia. You would have thought the president would be proud of that.
Why has crude bounced back to a level not seen since November 2014, the date when OPEC decided to leave the taps running, despite obvious evidence that the bath, full of West Texas Intermediate, was about to run over? At the risk of trotting out an old cliche, the simple answer, once again, is supply and demand.
In December 2016, the supply side of the global oil industry (led by Saudi Arabia) reversed the previous OPEC position and decided to limit oil output. Even more significantly, it convinced Russia, the largest oil producer outside of the bloc, to go along with its new limits, in what some have called the Vienna Alliance (after the Austrian capital where OPEC meets).
The agreement between OPEC and non-OPEC producers has been a big success. Its aim has been to drain global oil inventories of the over-supply that had built up in the days when oil was priced at over $100 a barrel. That aim has largely been achieved. Most analysts now believe that the world oil supply is closing in on the long-term market balance that OPEC and Russia have been targeting.
The demand side has been equally important. The big oil-consuming regions — Europe, India and China — have been enjoying a spurt of economic growth, which needs increased supplies of oil to feed their manufacturing industries.
At $75, the Kingdom's Vision 2030 strategy can be pursued with new vigor.
Frank Kane
With the US economy also growing healthily (aided in no small part by its own oil exports), the global economy has reached the stage where experts are beginning to talk of “synchronized” growth — a condition where major economies rise in tandem — an almost unprecedented state of affairs except for during brief periods in history.
Where does it go from here? There was much talk last week in Jeddah at a joint OPEC/non-OPEC meeting that producers would be happy to see prices rise to $100 a barrel, a figure that no longer seems so implausible. In fact, in such a tight, balanced market, any interruption to global supply — a final economic and political collapse in Venezuela, a geo-political escalation in the Gulf, a bad hurricane season in the Gulf of Mexico — would probably have a disproportionate upward impact on price.
Whether $100 oil is good for the rest of the world is a different issue. On balance, the answer is probably not. Such a level risks sending commodity markets into the kind of volatile spiral that caused the 2014 collapse in the first place.
There is less talk of the downside, probably because, in the new world order for oil, it’s hard to foresee events conspiring to send prices plummeting again. Another Permian basin is unlikely to appear out of nowhere overnight and throw supply side calculations into disarray. As long as the Vienna Alliance holds, it would take a major financial crisis and its economic fallout to seriously affect medium-term global economic growth, and thus provoke a collapse in oil demand.
So a band around the current level — say between $70 and $80 a barrel for Brent — looks likely to persist for the rest of the year. What does this mean for Saudi Arabia? It’s hard to see any negative effects. Most economists thought the 2018 budget was prepared using an oil price assumption in the range of $55-$60 a barrel. Now that prices have risen, the government can afford to be even more expansionary in its spending for the year ahead. At $75, the Kingdom’s Vision 2030 strategy can be pursued with new vigor; deficit elimination dates can be brought forward, and austerity measures can be further reduced. The new oil level also means a boost for Saudi Aramco, as it looks to get to its desired $2 trillion valuation in time for its upcoming IPO. The only perceivable downside is that the pace of economic reform in the Kingdom might slacken as the perceived need for reform is reduced. However, with the greater momentum for economic and social change in the country, that does not seem likely.
It has been a long and painstaking process to get the price of oil back to a level that seems to satisfy most people in the world. Keeping it there will be another challenge, but the oil industry can probably manage it without any help or interference from President Trump.
- Frank Kane is an award-winning journalist based in Dubai. Twitter: @frankkanedubai
