OPEC should be actually cautious about $80 per barrel

Oil prices are set to post their strongest weekly gain since July as geopolitical tensions threatened to accelerate the tightening of global supplies. In addition, the possible trade war poses another threat to demand.

The US benchmark crude ended the week up 8.6 percent amid simmering disputes across the Mideast region that is home to almost half the world’s oil. OPEC’s output has fallen to the lowest in almost three years, propelled in part by the magnitude of Venezuela’s downward spiral.

West Texas Intermediate for May delivery advanced 32 cents to settle at $67.39 a barrel on the New York Mercantile Exchange. Total volume traded was about 14 percent above the 100-day average. Brent for June settlement climbed 56 cents to end the session at $72.58 on the London-based ICE Futures Europe exchange, the highest since November 2014.

There are hints and reports which suggest that Saudi Arabia is likely shooting for oil at $80 to help finance increasingly ambitious domestic policy plans and to boost the valuation of its oil giant Aramco ahead of its much-hyped IPO.

But $80 per barrel could backfire spectacularly on both sides of the oil-market-balance equation.

A $80 oil would trigger an even bigger US crude oil production surge that could unravel OPEC’s efforts at eliminating the glut.

Oil at $80 could also slow down global oil demand growth, undermining one of the cartel key assumptions: that robust demand growth will absorb the non-OPEC supply and that demand growth will continue to be strong going forward.

On the demand side, oil at $80 could hurt global oil demand growth, which was the tailwind last year to help OPEC significantly reduce the oversupply. Demand growth could also slacken should the current US-China trade spat hurt global trade and impact global economic growth.

Khalid al-Falih, Saudi energy minister, recently sought to reassure the market that OPEC, which along with 10 non-OPEC allies led by Russia is in the midst of a 1.8 million b/d production cut agreement, would not allow prices to spike or crater through its actions.

“The goal is to create market stability so that upstream investment can occur to meet the projected 1.5 million b/d of increased demand in the foreseeable future”, Falih said

“What we are trying to do is not move the prices to any unreasonable level,” he said. “What we are trying to do is make sure that supply and demand are closely matched so that markets are not worried about gluts and oversupply and continued investment will flow into the industry. Until we see we are coming to a reasonable level of investment we will continue to be concerned,” he said.

FRANK UZUEGBUNAM