The cap on the oil price

di Finanza Operativa 17 Novembre 2016 | 13:30

A cura di di Walter Snyder, Swiss Financial Consulting

Some time ago this Newsletter predicted an oil price of US $50 per barrel in the short term (see Newsletter 92 of 22.01.2015) and possibly prices later ranging from $60 to $65. American shale oil producers can now make profits at $50 to $55 a barrel in the Eagle Ford Basin and a bit more in the Bakken fields while those in the Permian Basin can do well at $30 a barrel. The prediction of an oil price at about $50 has thus proven to be quite accurate so far. Regarding the future for oil prices, a cap of $60 to $65 seems to be fairly safe as a prediction. The Americans will increase production as soon as the price reaches $55 a barrel or even before that.

There are of course many other considerations that influence the price of oil. Big oil companies are cutting back on exploration where the costs of extracting the black liquid are high. That means less exploration in the Arctic and deep sea areas. The Norwegians are experiencing problems with the costs of maintaining off-shore drilling platforms while the Saudis keep up high production levels as do the Russians. Iraq has been increasing production while Venezuela has seen production fall due to problems stemming from a lack of investment in equipment. Iran has upped production levels after the removal of sanctions and strives to improve its market share. Nigeria has long-standing problems of sabotage, corruption and inefficiency that hamper development.

Then there are the serious geo-political problems connected with the Syrian conflict. The policy of the Trump administration that will take office in January 2017 may bring about some changes, but at the present time it is not clear how the situation will develop. The defeat of IS may help Syria to start producing again. Libya remains a failed state, and it is hardly to be expected that a peaceful situation will come about any time soon. It is therefore reasonable to conclude that oil production in Libya will remain a questionable quantity for the near future.

The conclusions to be drawn from the above for investors and traders are that a good bit of volatility is to be expected for oil prices and that they may easily range from $45 to $50 as one can see from recent price charts. If suppliers maintain high levels of production, then prices in the $40 range are quite likely while it is improbable that a rise in prices to $55 a barrel will be sustainable given that American producers will want to see their cash flow increase. This is bad news for countries that have come to depend on oil revenues. Saudi Arabia may float other bond issues, and the Gulf states will have to trim their budgets. On the other hand, the news is good for consumers. If there is inflation, it will not be due to oil.

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