Oil Prices: $75 Crude, Here We Come

By Russell Gold,
Wall Street Journal
Oil prices are on the march, again, surprising many observers by reaching $66 a barrel in the midst of a global downturn.

Next stop? Respected oil-market analyst Paul Horsnell of Barclays says $75. “When the market as a whole starts to believe that $75 is pretty much inevitable, then it might as well go straight to it,” he says.

Oil prices aren’t rising because demand is recovering or because record-setting oil inventories are being burned off. Rather, Mr. Horsnell says, the market believes OPEC is coordinated enough to defend a price floor, presumably through acting together and keeping production in check. Add in a growing belief that the economy could be regaining its footing and oil prices will climb to the price that OPEC is willing and able to defend.

With the growing belief in OPEC and a coming financial recovery, “there would be no reason why the current price rally could not extend to $75 within a fairly rapid timeframe,” Mr. Horsnell wrote in his weekly overview of oil-market conditions.

Believers in oil-market fundamentals are left scratching their heads. Exxon Mobil Corp. chairman and chief executive Rex Tillerson told reporters earlier this week that he couldn’t see any reasons involving supply and demand to push up oil prices. He attributed the recent oil rally to fluctuations in the U.S. dollar and people trying to get in front of a perceived economic recovery. “But it’s just a bet on their part as to whether the green shoots have roots or not. And none of us really know yet,” he said.

Of course, the price of oil has made significant moves independent of the supply-demand equation. This is what many people think was responsible for the price rally on 2008, when crude topped $145 a barrel in July.

So what happens if Mr. Horsnell is right and oil hits $75 a barrel? There will be a period of adjustment, with downward pressure until storage and demand fundamental figures catch up. And there’s no guarantee the fundamentals will catch up, setting up the potential for a dramatic drop.

And if oil does jump much higher, it might actually postpone the price spike everybody seems to be worrying about. Oil at $75 could stunt some of the green shoots now sprouting in the global economy, reinforce newfound oil frugality, and push back any serious recovery in oil demand.

1 comment:

  1. then this means Petronas and the BN administration is set to gain from this rise in crude oil. this could be a bad combination for the public - with RON 95 coming in to replace RON 92 in Sept or sometime like that, price levels can only go up while we suffer economic contraction.

    Najib administration now has an opportunity to use the additional revenue to score brownnie points if he wants to

    by the way, has anyone felt the benefits of the RM4 billion that ws supposed to be saved from reduced subsidy channelled into public transport?

    I only remembered since then
    1) accelerated capital allowances for purchases of buses (money does not come from tax collectors)

    2) proposed and withdrawn toll increases (another raise a crises and solve the crises standard operating procedure)

    3) RM625 refund for car owners (and let us forget about people who own no motorised transport)