The oil price has risen slowly, but surely, during the last few weeks. Arab light is currently around $56. The recovery from last year’s slump was already underway from the beginning of 2017. The trajectory can be seen in the following graph:
As can be seen from the graph, the last few weeks have witnessed a further surge in the price of oil. Brent crude edged just over the $59 mark this week, marking a two-year high. It is worthwhile to analyse the reasons and effects of this rise and to gauge what the trajectory of the price will be in the weeks to come. The most important to be considered is the announcement made last year in November by OPEC to cut oil production by 1.2 million barrels a day. On top of that Russia, which is not a member of OPEC, also agreed to cut production by a further 600,000 barrels a day. Collectively, this accounts for around 62% of global oil production.
Recently, there have been news flows about a decision to extend the cut beyond March 2018 that provided key support to oil prices despite the looming supply side risks. Another factor that has contributed partially to the rise in prices is the impact of hurricanes, Harvey and Irma, in the US which has led to US oil refineries running out of crude oil. One fifth of US national refining capacities were shut down. Now, with the refineries resuming operations, the demand for crude oil has picked up. At present, there are around 13 refineries in the US that have delayed maintenance due to the hurricane. The combined capacity of these refineries is 3.27 million bps and further inventory builds are to be expected.
Another event that added an impulse to the price rise was the recent speech by President Erdogan of Turkey. He threatened to turn off an Iraqi oil pipeline after the Kurds voted for independence in a referendum.
Whether the oil price will rise further or subside has been speculated extensively in the last few weeks. This would be dependent on few key factors such as a) continuation of production cuts beyond March 2018, b) resurgence in US shale oil production and c) global demand scenario. Given the likelihood of resurgence in US shale oil production, oil prices are expected to be range bound within a band of US$ 45-65 over the next 12-15 months. Anything around US$60 per barrel or below should bode well for import dependent countries like Pakistan and should not put further strain on already widening trade deficit next year.
Muhammad Faran is an economist associated with IPI.