Crude oil has rallied 30 percent in the last five months. Having moved to a four-year high last week, speculations were rife that $100 a barrel is only a matter of time. There has been some respite since last week, ever since the IMF released its global economic forecast, predicting a slowdown in global economic growth.
So, while crude at $100/bbl may still be distant – there is little to suggest that the IMF’s global economic growth forecast alone could pull the prices back in the $60s or even $70s. Moreover, the drop in Iranian oil exports is believed to be significant enough to more than make up for the expected decline in global oil demand caused by economic slowdown.
Saudi Arabia is still on its way to achieve oil near $90/bbl to live the Aramco dream. It may be happening a bit too slowly for their likings, but Opec’s resilience and unexpectedly strong commitment to reduced production levels and freeze have ensured that it is more likely to happen than not. That said, the Iran sanctions, coupled with the loss of production from Venezuela and other war hit Middle East producers – is likely to contribute more towards the bull rally.
The biggest variable currently in the whole scenario is the global crude oil stockpile, which is at historically low levels. Even if the likes of Russia and Saudi Arabia ramp up production to the tune of million barrels per day, the critical inventory stock would be too low to stand any natural calamity or disaster. This is why most pundits have attached a much higher risk premium to global inventory – even higher than the potential geopolitical threats.
Some surveys have shown that investors are not writing off triple digit oil prices as early as December 2018. From what it appears, the days of OPEC dominance and dictation are numbered – and the demand dynamics have taken precedence in the oil market. For Pakistan, this may not spell good news. Faced with high deficits and balance of payment crises, oil rallying over $80/bbl could spell more trouble for the already troubled economy.
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