Has oil hit a 'sweet spot' for the global economy?
In the end, the rise above US$50 a barrel for oil did not last long. It was a significant milestone that the ongoing rally had built up enough steam to get over the psychologically important threshold this week.
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But concerns over supply still worry investors and international benchmark Brent crude, having hit a new 2016 intraday high of more than US$50.50 a barrel yesterday, fell back to a little more than $49 a barrel in London this morning.
"The global surplus still exists and there is still a possibility that oil prices could retrace further," Dominick Chirichella, a senior partner at the Energy Management Institute in New York, told Reuters.
Jim Ritterbusch, of Chicago-based oil markets consultancy Ritterbusch & Associates, said: "We are viewing current risk/reward ratios as unfavorable toward new longs [bets on higher prices] at current levels." He cites a potential drop of Brent to US$47.50.
Reason for increases
In truth, prices have been caught in a narrow range of US$48 to US$50 for the past two weeks. Production outages in Nigeria, Canada and Iraq have boosted a more bullish view of the global oversupply situation, but pledges by Saudi Arabia and Iran that they will continue to ramp up output offer a bearish counterweight.
Perhaps, more pertinently, there are those who believe the break above US$50 could encourage more drilling, especially in the US shale sector, and that this will eventually send prices spiralling down again.
An alternative view is that current prices are something of a "Goldilocks" scenario, says the Wall Street Journal, with US$50 oil a "sweet spot for the global economy". It believes this level provides enough succour for producer nations and companies, without encouraging renewed supply, and is sufficiently low to boost the global economy.
"Prices in the US$50 to US$60 range would be high enough to ease some of the pressure on producers, while still low enough to boost spending on other goods and services," Julian Jessop, the chief global economist at Capital Economics, said.
The WSJ adds that US$50 oil could be a "red herring" and that the real price level to watch out for is between US$60 and US$65.
If current trends persist, says Citigroup, there is a chance this could be possible by the end of next year. — The Week/GB