The oil industry has started to think of what was unthinkable only a few days ago: the high chances of crude oil to settle at a new normal – a higher normal. Brent crude oil prices have hovered between $45-55 a barrel for some time now, but they touched a two-year high of $64.05 a barrel at the beginning of the week after the prices crossed $60 on October 31.
The steady increase in prices has been a product of Saudi Arabia and the rest of the OPEC keeping their promise in keeping supply under control, while the recent spike in prices comes from the well-known oil sector driver: the instability in the oil producing countries. Oil prices surged to their highest levels since the mid of 2015 due to the geopolitical risk arising from a major political shakeup in Saudi Arabia.
Will this bullish sentiment in the oil market sustain? There are two sides to this argument. Saudi Arabia has arrested 11 princes and dozens of senior officials and businessmen just recently. The bullish lot is not just pinning the royal purge to the chances of a sustained increased in oil prices, but also rising geopolitical uncertainty overall to release the animal spirits. This also includes the recently fired rocket from Yemen toward Riyadh as Saudi Arabia wages war against rebels in Yemen. The analysts are of the view that the Kingdom is at crossroads with low oil profits, a failed attempt to influence Qatar, no visible result of war with the Yemen rebels, and now a heated game of thrones.
Also, the analysts are whispering the prospects of oil prices ending 2017 on a higher note due to OPEC’s successful output cuts to brimming demand. On the other hand, US shale producers seem to have eased too, which is also raising supply concerns.
The second argument banks more on historical trends and a long term view. Analyst at Wells Fargo Investment Institute points toward the commodity bear super-cycle, which is considered to usually last for 20 years on average and has roughly three stages. Going by this argument, Well Fargo highlights that the oil market currently is in the second phase denoted by range-bound trade in oil prices lasting for years; the oil market has already crossed the first stage characterized by the weeding out the weakest exploration and production companies. The final stage is when the market finally turns around the bear super cycle. “Yet, we are only in the sixth year of a commodity bear super-cycle—and this oil bear has room to run”, says Austin Pickle, Investment Strategy Analyst at Wells Fargo Investment Institute.
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