Oil prices may rise to $150/bbl if Saudis cut output: UK company
Baku, Azerbaijan, Oct.16
By Leman Zeynalova – Trend:
If Saudi Arabia were to cut the oil output on a similar scale as it did in the 1970s, the price can reach $150 per barrel, UK-based Capital Economics consulting company said in its report obtained by Trend.
“We do not expect Saudi Arabia to cut oil production. However, if the Kingdom were to cut output on a similar scale as it did in the 1970s, a price of $150 per barrel would not be unrealistic,” said the report.
There is little doubt that Saudi Arabia has the ability to single-handedly engineer another “oil shock”, according to the company.
“It produces about 12 percent of the world’s crude, it is the largest exporter and it is the only producer to have significant spare capacity. Our current forecast assumes that it will actually increase production to around 11 million bpd, from 10.7 million bpd currently, in 2019 and that the market will be in surplus,” said the report.
The UK company believes that if Saudi Arabia were to cut output by 25 percent (as it did in the 1970s, the only other time it has cut production for political rather than economic reasons), the market would fall into a significant deficit and prices would soar.
“Indeed, the oil price could approach $150 per barrel within a few months. This does not look too improbable given that the Saudi cut would come at a time of declining output in Venezuela and Iran. The oil price (Brent) has already proved its sensitivity to changes in supply this year, rising by nearly 20 percent since August on fears of a sharp drop in Iran’s production as a result of the re-imposition of US sanctions.”
Admittedly, higher prices would encourage production elsewhere, notably in the US, according to the company.
“It would probably also lead to lower consumption, given the usual demand destruction associated with higher prices as well as efforts to move towards greener energy. After all, the quadrupling of prices in 1973 sparked huge investment in new oil fields and OPEC permanently lost market share. There were wholesale switches away from the use of oil in power generation, in particular, and efforts at conservation. What’s more, in the long-term, even the boost to real prices proved unsustainable. “
To sum up, Capital Economics believes that Saudi Arabia is unlikely to cut output, not least because it would probably involve a loss of market share at a time when green technology is already threatening to curb oil demand.
Follow the author on Twitter: @Lyaman_Zeyn