Global: Oil Prices Have Rebounded, What Happens Next?

4 MINS READMay 17, 2018 | 19:33 GMT
The Big Picture

When oil prices fell in 2014, there were winners and there were losers. And now that prices are rising, the same will be true again. Oil prices finally topped $80 per barrel for the first time since 2014 and if higher oil prices stick, the consequences will be global.

What Happened?

Global oil prices continued their rise as the European light sweet crude oil benchmark, Brent, hit a milestone $80 per barrel for the first time since November 2014. To put the rise in perspective, one year ago the benchmark traded at around $51 per barrel, while two years ago it was at just $49 per barrel. The dramatic turnaround is music to the ears of Saudi Arabia, Russia and other major oil producers that have been cutting production for nearly a year and half to turn around the market.

Now these countries can declare mission accomplished — sort of. They originally intended not just to prevent and reverse the slide in crude oil prices, but also to draw down ballooning global inventories — caused by Russia, Saudi Arabia and others seeking to protect their market share in the face of rising North American light tight oil production — below their five-year averages. According to the International Energy Agency's May report, the countries belonging to the Organisation for Economic Co-operation and Development have, in fact, finally reached their drawdown goal. (Though it should be noted that the five-year average is higher now than it was in 2014 because it includes 2015-17 inventory levels).

What's Next?

During the upcoming June meeting for the countries involved in the production cutting agreement, participants could discuss ways to return production to higher levels. If the agreement remains in place, oil prices could rise further, unless sanctions biting off oil exports from Iran underwhelm.

Saudi Arabia, which is hoping high oil prices will help it gain a better valuation for Saudi Aramco's initial public offering, has communicated that it wants oil prices above $80 and perhaps even closer to $100. And given the current state of spare oil capacity, Riyadh will probably get what it wants. The oil cuts have taken roughly 2.4 million barrels per day (bpd) of oil production off the market, and it can't all come back. Venezuelan and Mexican oil production continues to decline; indeed, production in Venezuela is down more than 600,000 barrels per day since cuts began at the start of 2017. And the United States' incoming sanctions on Iran have the potential to take as much as 500,000 to 600,000 bpd of exports (at the extreme end) offline by the end of the year.

Only a few countries currently have a meaningful amount of spare production capacity: Saudi Arabia (2.1 million bpd), Iraq (340,000 bpd), the United Arab Emirates (330,000 bpd), Kuwait (220,000 bpd) and Russia (estimated to be about 200,000 bpd). Most of the production cuts beyond those countries have been driven by involuntary falling production, and much of Iraq's offline production is mired in a political dispute over the Kirkuk oil fields between Kurdistan and Iraq. Considering that Saudi Arabia's Gulf Cooperation Council allies will fall in line with Riyadh's policies, and that Russia alone cannot replace Iran's oil production numbers, Saudi Arabia has the opportunity, at least for now, to steer the market in the direction it wants.

Why Does It Matter?

Ultimately, the windfall in oil prices will result in winners (oil producing countries) and losers (consumers). While oil prices and production were down, all major producers focused on significant fiscal consolidation, and now that prices are up, many governments could abandon various reform efforts and loosen their purse strings. Already, Kuwait announced that it was delaying the implementation of its value-added tax — designed to generate non-oil revenue — until 2022, though it had originally agreed to implement this year.

For consumers, rising oil production could affect global growth in the developed world and contribute to inflation. The International Energy Agency, for example, has already cut its projected levels of growth in oil demand for 2018 because of rising prices. Additionally, estimates have suggested that a return to $3 per gallon for gasoline prices in the United States could wipe out nearly a third of the individual tax income breaks that came from the United States' 2017 tax reforms

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