Oil price: Worsened by a strong dollar

Global oil prices (both West Texas Intermediate and Brent) breached the US$70.00 per barrel mark in the last week of June. To think that oil prices opened the year at US$60.00 per barrel only, this is quite alarming. Thus, most pundits and doomsayers alike are predicting that towards the end of the year, oil prices shall be hovering around US$80.00 per barrel. The possibility is not remote though.

To recall, 2008 saw the rise of oil prices to US$147.00 (historically, the highest so far) per barrel in July (when the US economy was still good) and witnessed its plummeting to US$37.00 per barrel towards the end of the year. Its price decline was never difficult to comprehend. It was primarily due to a sizeable drop in the demand for oil in the USA.

Undeniably, the world’s biggest consumer is the USA. They consume more than 20 million barrels a day or more than ¼ of the world’s output. Therefore, demand for oil is largely influenced by USA’s industrial and personal consumers’ behavior. Precariously, the USA was in dire economic crunch since the middle of 2008 until end of 2009. Consequently, its demand for oil had substantially dropped.

Obviously, the USA is better off today than it was in 2008 and 2009. Therefore, as jobs and other economic indicators turn brighter day by day, its consumer spending is on the rise again. Consequently, the US economy leaped further and their demand for oil increased. Thus, contributing to the rise in oil prices. Moreover, not long ago, the 13-member OPEC and some non-OPEC member countries like Russia, Mexico and Kazakhstan agreed to shave off production. Logically, therefore, oil prices continued to rise in 2018.

Adding to the consumers’ anxieties is the fact that Venezuela is in a turmoil. Due to its political instability, oil production output is largely affected. Moreover, economic sanctions on Iran has considerably affected production output as well. These two unpalatable developments definitely brought global oil prices up. We can find some solace though in the fact that Saudi Arabia and Russia are planning to increase production output. Expectedly, these increases will be able to offset the output decline in Venezuela and Iran. Thus, stabilizing oil prices.

With the planned increases in output of Russia (the world’s largest oil producer) and Saudi Arabia (the world’s second largest), some sectors in the country are hoping that prices will go down as low as the prices in the late 2008 and 2009.

Honestly, this is wishful thinking. Why? The economies of both Russia and Saudi Arabia are both dependent on their oil outputs. Deutsche Bank, for one, calculated late 2008 how high oil prices have to be for OPEC countries to maintain their budgets. Iran and Venezuela, two of the most vocal and seemingly arrogant countries who are often the first to call for production cuts, need the highest price per barrel of US$95. Russia needs about US$70, while Saudi Arabia, OPEC's largest producer and de facto ruler, needs about US$55 a barrel. But taking all these measures together, the bank says US$60 a barrel seems like a probable place for oil prices to level off.

Deutsche Bank (in making such calculation), however, failed to consider USA’s influence in the world’s oil prices. In doing so, it should have factored in the oil drilling activities in the USA and the companies’ expected returns on investments and operating costs. For instance, in the last quarter of 2008, while the majority of the rest of the USA was in distress, the oil producing town of Bradford in Western Pennsylvania was booming.

However, the prices that went below operating costs in the last quarter of 2008 and the first quarter of 2009 sent some producers packing. Allegedly, for these oil producers to sustain their operations, oil prices should not go down below US$75 a barrel. They find no sense to maintain their wells with oil prices below this level. In saving its own citizens, naturally, the USA shall influence the oil prices in the world market.

Therefore, with Russia’s preference for US$70 per barrel and USA’s producers at US$75.00, expect prices to hover around these prices. Unless, of course, a major development shall arise.