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Oil Prices to Rise Again as Saudi Arabia Signals Renewed Supply Cuts?

by Paul
Oil Prices to rise again

While directly investing online in the price of oil is more the preserve of short term traders than long term investors, the price of oil strongly influences financial markets and any sector in which oil is an overhead. And that, to a greater or lesser degree, is most sectors that the companies you hold shares in, either directly or through funds.

The price of oil can even influence how much money you are able to set aside each month for investing online in an ISA, SIPP or defined contribution workplace pension. When it goes up and down it has a knock-on effect to the cost of transport, heating, anything made from rubber or plastic or where oil or oil-based fuels are involved in the production process.

So keeping up with oil price trends is important for any kind of investor, not only day traders. That’s been a challenge lately with prices so dynamic and shifts in geopolitics pushing and pulling at the going rate for a barrel of ‘black gold’. In 2014, a barrel of Brent crude oil cost close to $120. By early 2016, that had dropped to as low as $30. This year oil prices have been especially volatile.

OPEC, the organisation that includes many of the world’s largest oil producing nations, decided, along with non-OPEC partners such as Russia, to slash production, bringing down global oil inventories with the aim of putting a floor under oil prices as their economies suffered as a result of historically low prices. Combined with unforeseen circumstances meaning output from Venezuela has fallen off a cliff and new U.S. sanctions on Iranian oil exports, it worked. Many would say too well. Oil prices were back up to almost $86 in early autumn.

However, under pressure from the U.S., Saudi Arabia and OPEC have been pushed into increasing oil output again and prices have dropped back to just above $70 – considered about right. High enough to keep oil-dependent economies ticking over and oil and gas companies liquid enough to invest in new exploration and technologies R&D. But not so high as to place severe pressure on sectors, like transport and heavy manufacturing, for which oil is a major overhead.

But Saudi Arabia is keen to avoid any further drop in price and is now again considering scaling back production to prevent that. The country has initiated a vast and hugely expensive programme of economic and social reform as it plans for a future where it can no longer rely almost solely on its huge, easy-to-access oil reserves in order to maintain a functioning economy. The Middle Eastern monarchy is concerned an economic slowdown next year, helped along by the current trade dispute between the USA and China, will lead to a drop in demand for oil. It fears this will mean current production levels result in the kind of oversupply that saw prices plummet as recently as 2016.

Saudi Arabia appear to favour erring on the side of caution and would rather risk oil prices high enough to hit the global economy than low enough to mean the state has to tighten the purse strings. Of course, it is a balancing act as oil prices going too high would also hit demand. Russia, currently the world’s second largest oil exporter, is confident current production levels won’t lead to oversupply and a price crash next year. Or the country needs cash now enough to be willing to take the risk. The Financial Times reports that sources close to Moscow’s oil output policy aim to boost production by up to 300,000 barrels a day over the next several weeks.

The divergence of Saudi and Russian policy, with the two countries having closely collaborated in recent years, injects a fresh dynamic into the oil market and makes 2019’s price trend(s) even harder to predict. Anyone investing online should keep a close eye on developments as oil price looks set to play an increasing role in international economics, geopolitics and financial markets over the coming period.

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