the deal with oil

Whilst other commodities have been stagnating, the oil price continues to rally.

Eighteen months ago, commodities analysts were talking about how OPEC was using its extensive supplies to keep oil prices lower, and force newer producers out of the market.

OPEC was aggressively maintaining strong production to keep prices artificially low, to try and force unconventional producers, such as frackers and horizontal drillers, out of the market.

Whilst this did hurt the national budgets of many OPEC members, it was deemed necessary in order for the cartel to maintain its hold on the oil market; The US was on the path oil self-sufficiency after all.

However, from mid-2017 onwards, something strange happened.

Oil prices started rising again.

And rise they have. The West-Texas intermediate (WTI) crude, a standardised oil price metric, is now almost 60 percent higher than its one-year low.

So what is causing this? Certainly, there is a beneficially global environment for oil price rises – the global economy is growing at its strongest pace in years, and political events are hampering production from Venezuela and Iran.

However, production curbs by OPEC are also playing a part. Over the past twelve months there has been some fairly aggressive reductions in OPEC’s production, and this is helping prices higher. It seems that OPEC now wants oil prices higher.

One of the reasons for this could be the much-slated initial public offering (IPO) of what may be the world’s biggest company, Saudi Aramco.

Saudi Aramco is the world’s largest oil company, and its IPO would likely be the largest ever. Most analysts have predicted that the Kingdom will launch the Aramco IPO in the second half of 2018. However, given a lack of conclusive news, some are now predicting it will happen in 2019.

Regardless, a higher oil price will certainly mean a greater take for the Kingdom in the Aramco IPO.

Consider what the effect that rallying oil prices had on the share prices of our listed oil producers (Woodside, Oil Search, etc), and you can see why oil prices could mean literally billions of dollars of additional value for the Saudis in a potential IPO.

That means there are billions of reasons for one of the world’s biggest oil producers to want oil prices higher. There are now plenty of analysts with a target price of $80 a barrel for WTI crude.

However, too high an oil price, and it could start to damage the global economy. According to UBS, a rise back to $100 USD a barrel in the short-term would trigger a recession in the US.