Oil demand is growing, and production is falling. This is the message we have been receiving for a few weeks now with increasingly frequency, especially after OPEC's leader Saudi Arabia admitted it would like oil prices even higher than US$70. Like a genie from a lamp, the market immediately obliged with traders rushing in to buy more oil, pushing Brent closer to US$75.
Everyone who's anyone seems to be upbeat about demand. The IEA forecasts daily demand growth at 1.5 million bpd this year. Reuters shipping data suggests April imports into Asia will hit an all-time high. Investment banks are bullish. What could go wrong?
If you listen to Goldman's Jeffrey Curry, nothing. In a recent interview with Bloomberg, Currie said, "You'd have to get a really high price before you start to see it damage demand," adding that higher oil prices were actually good for the global economy because "higher oil prices lead to creation of global excess savings - petrodollars," which are then invested again globally, stimulating further demand.
In case anyone suspects there is something wrong with this rosy picture, they are right. For starters, these "global excess savings" will only come after oil producers close their budget gaps. Saudi Arabia alone has budgeted a deficit of more than US$50 billion for this year. It will be a while before it gets to have any savings, let alone excessive ones, to invest globally and stimulate oil demand. This is true of other major producers, too, as they all were hit hard by the last oil price crisis.
Leaving budget deficits aside, there is also the problem with inflation. Since virtually every single economy in the world is dependent on oil, inflation is closely linked to prices. Higher oil prices mean higher fuel prices and higher fuel prices drive higher inflation. Although in some circumstances higher inflation could be a welcome development, this doesn't seem the case right now. Related: Terror Attack Shuts Down Libyan Oil Pipeline
Another question that needs asking is whether it is really demand that driving oil prices right now. Commerzbank's head of commodities, Eugen Weinberg, thinks not. Weinberg told Oilprice there were four distinct drivers behind the latest price hike in oil. First, there are worries about Venezuela's oil production, which is at its lowest since 1950. Second, there is Saudi Arabia's "wishful thinking" about oil at US$80-100 a barrel. Thirdly, Weinberg also noted the possibility of new U.S. sanctions against Iran, which this week pushed Brent even higher. Finally, Commerzbank's head of commodities said, there was a massive influx of money from money managers: net longs on crude on both ICE and Nymex are at record highs.
Meanwhile, production outside OPEC is growing, and specifically production in the United States. The avalanche of upbeat comments from the OPEC camp has displaced the concern about the consistent and strong growth in U.S. shale production from the mind of the oil-industry beholder, but the growth is still there even if ignored.
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Last week, U.S. producers pumped 10.54 million barrels daily. This is more than a million barrels daily higher than production at the start of January. In other words, U.S. producers have expanded their production by more than a million bpd in less than four months. At this rate of growth, it's not hard for one to imagine where U.S. production could be in another quarter. This trend will certainly have a marked impact on prices when the hype around OPEC's latest meeting subsides, as will any revisions of demand forecasts in light of higher prices.
In this context, the prospect of Iran sanctions could remain the lead driver behind a further price rise if they ever materialize. After all, President Trump shared his unhappiness with higher oil prices last week, and he must be aware of what a fresh round of sanctions against Iran would do to these same too-high prices.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
Sitting. Also this Saudi/OPEC/Russian engineered increase in prices is great for US oil which I’ve predicted many tines would exceed all estimate. I predicted 11 million barrels by the end of this year but now I’m saying 11.5 Million. Now is the time to get that oil & gas out of the ground & on its way to being used while their are hundreds of billions to be made. This is also lone a blood transfusion to renewables. Who would guess the oil industry would intentionally give them a window to flourish w their current higher costs while they bring down those costs. As for Goldman. They are pimping for the Saudis. I don’t know but I would guess right now they have a piece of the Saudi Aramco IPO. Not very ethical it seems to me.
But it is really a novelty in the science of economics that the high oil prices will somehow produce a net positive effect on the world economy. High oil prices in a large degree represent rent, not profit in the true economic sense, that is being appropriated without replacement thereof with any goods or services in return.
To say that high oil prices help world economy because of some savings (or hoarding - that's what was meant by this Goldman Sachs economic postmodernism) is not that different from saying that 10 decades of saving by consumers, and not spending, will produce an overall positive impact on the economy only because sometime in the future they will start spending part of the accumulated money - well, it is just a 10 year long delay in development, nothing more than that, because otherwise this money would have been invested before in well-planed organic way.