The rise and fall of Oil: Behind the headlines

5th July 2012

Oil falls below $90 for first time since Dec 2010 – Reuters

"There are two arguments here – one long-term and one short-term. In the short term, I think it is worth looking at the influence of OPEC actions on the oil price. A couple of months ago, when oil was at $120 a barrel, the Saudis were vocal about their desire  to see the oil price return below $100. This was driven both by economic and political considerations.

Economically, we believe that the Saudis would prefer an oil price in the $80-100 range since this would achieve a reasonable balance between continuing to provide them with the domestic revenues they require, whilst also being a price that does not act as a drag on world economic growth… ?

There are also political considerations, in particular Saudi Arabia's relationship with Iran. If Iran gets too good a price for its oil, the Iranian government will be less affected by sanctions, even if their production is falling. Saudi Arabia wants to see a resolution to the nuclear stand-off.

From here, we believe that the Saudis will start to reverse their actions. They openly talk of defending an oil price of $85 plus, and they are likely to be supported in this by UAE and Kuwait. The spot oil price may continue to be volatile but these OPEC members have quite enough firepower to shore up the price at their desired level over the longer term.

On the demand side, there is weakness in Europe with a number of countries back in recession and slight weakness in the US. That said, demand data from emerging markets continue to be relatively strong. There are genuine concerns about an economic slow-down in China, but the oil import numbers continue to be fine. Overall, we expect oil demand in 2012 to be higher than in 2011. 

In the long-term, there are some forecasters who predict a sharp rise in the non-OPEC production in North America. New drilling techniques used in natural gas are now being used in oil. There is an opening up of oil fields across the US that could make a real  difference and reduce US dependence on oil imports by the end of the decade. One of the key questions, though, is the cost of that oil. The oil price would probably have to be around $75 a barrel for many of these projects to be sustainable."


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