Is oil price hitting $100 an advantage?

Kamel Al-Harami

I certainly hope not after it hit $80 last week. Now oil markets are talking about a higher level, claiming that $100 is not far away. This could happen if OPEC decides to play a passive role in doing things and keeping its production cut of 1.8 million barrels in place, despite the sharp reduction of almost 50 percent in the Venezuelan oil production. If Iranian oil is going to be boycotted again, OPEC will be under heavy international pressure to take some prompt action. Undoubtedly, any crude-oil price level above $75 represents a threat to the global demand on oil.

A level of $80 per barrel means automatic reduction in production of oil by more than 100,000 barrels per day, and higher global inflation. The pressure on OPEC is going to increase especially from the consumers in China and India to whose markets OPEC is trying to build and gain access, as they are the biggest future consumers of oil and represent the dream lands for any oil producing countries with high oil reserve. The sudden surge in oil prices, which has jumped by more than 70 percent since last June, is nothing to smile about.

OPEC is requested to act soon to stabilize the oil prices again, especially since it along with Russia succeeded in reaching a common commitment to reduce oil production by 1.8 million barrels per day. This resulted in a fair and stable price level within the range of $70 and got rid of the excess oil in the market. The threat of the US and its decision to impose oil sanctions on Iran means reduction of more than 500,000 barrels from the market, which will lead to further tightening in the market.

This along with the continuous trouble with the oil production in Venezuela will lead to further escalation and trouble for the recently established oil markets. It is time for OPEC to act quickly along with Russia to ease the production cuts but in smooth order to avoid the experience of November 2014 in terms of collapse of the oil prices. While other producers cannot meet the required demand, even US shale cannot help as it does not have the necessary infrastructure to meet such surge in demand. It still does not have the necessary pipelines, storage tanks and production facilities to extend beyond 1.7 million barrels.

This is why it is up to the big oil producers such as Saudi Arabia to relax and put more oils to the thirsty markets when the demand is good and the prices are of an acceptable form. We hope such jump in oil prices is short lived and lets OPEC take up the role to bring the oil prices to order again. For the time being, we are not in need of $100.

By Kamel Al-Harami
Independent Oil Analyst


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