But will it sustain beyond the Saudi Aramco IPO?
One commodity that has been quietly heading upwards is crude oil. Brent crude is already above $57/bbl and is looking all set to touch the $60/bbl mark. How much higher than $60 it goes is uncertain at the current point of time. US shale is not flooding the market any longer and that is helping prices move higher. There are 3 key factors to watch out here…
The Harvey and IRMA effect…
The impact of Hurricane IRMA was the first major reason. Actually, the IRMA and Harvey hurricanes were expected to temper oil prices as most refineries off the coast had to shut down. However, the refining re-commenced much faster than anticipated. This ensured that despite fall in refinery demand, the crude demand did not get sharply impacted. Secondly, the crude shale output in the US has also fallen sharply to around 8.7 million barrels per day (bpd), which has helped to maintain the balance between supply and demand thus, keep prices buoyant. Obviously, when prices went below the $50/bbl mark many shale rigs were forced to shut down due to non-remunerative prices.The US has realized that fighting down prices too low is not helping its own cause too. The idea is to keep its oil output buoyant without destroying oil prices too much by flooding the oil markets. That appears to be the broad terms that the OPEC, Russia and the US appeared to have agreed to.
How much higher will oil go?
It may be a hard call but much higher levels than $60 look quite difficult for now. It is estimated that above the $60 mark the demand/supply equation once again may start favoring excess supply leading to lower prices. The OPEC also has an interest in not letting prices go too high as it could again rekindle demand for alternative energy sources. The price of $60/bbl is the ideal equilibrium price for OPEC and the US wherein oil economics can be sustained without encouraging too much of alternate energy demand.
It is all about Saudi Aramco IPO…
At the end of the day, the story behind the strong oil prices may boil down to the forthcoming Saudi Aramco IPO. At nearly $2 trillion valuation, the IPO will be the biggest ever. For Saudi Aramco to get attractive valuations and for investment bankers to sell the issue,buoyant oil prices are a must. Saudi Aramco’s profitability is directly linked to high oil prices and the OPEC will have to present a strong story of higher oil prices if the Aramco IPO has to sail through. It is very likely that we may see oil prices sustaining around the $60 mark for quite some time to come. That would be good news for the oil markets as a whole as it will approximately match out demand and supply. Thanks to the Aramco IPO, the oil price disruptions will be mitigated for now!
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