The oil markets are on edge. Benchmark Brent prices have increased by more than $45 per barrel or 170 per cent from their cyclical trough in early 2016. Only over the last few weeks prices have risen by 15pc. Expectations of renewed US sanctions on Iran, declining output in Venezuela, continuing strong global demand and the Saudi desire to generate additional cash flow are all contributing to the significant upward market swing.

As per Reuters, Saudi Arabia — the Opec kingpin — is pushing for the price of $80 a barrel or even higher. Riyadh would be happy to see crude rise to $80 or even $100 a barrel, Reuters quoted three industry sources as saying.

The Opec-Russia output cut arrangement has helped boost oil prices this year to the highest since November 2014. But the kingdom wants the rally to go further.

Two industry sources said a desired crude price of $80 or even $100 was circulated by senior Saudi officials in closed-door briefings in recent weeks. The Saudi oil minister also did not out rightly ruled it out. Indicating that Riyadh may still want higher oil prices, Al-Falih told reporters in New Delhi, that current oil prices won’t bring back big investments, underlining though, he didn’t know what price could do that.

Not everyone seems happy with the rising prices. US President Donald Trump responded to the Organisation of Petroleum Exporting Countries (Opec) quest in his usual style: “Looks like Opec is at it again…Oil prices are artificially Very High!” he tweeted.

The stated objective of the output cut arrangement was to balance supply and demand and reduce the inventory glut. By Opec’s parameters, the deal has worked. Oil stocks in developed economies in February stood a mere 43 million barrels above the latest five-year average, down from 340m barrels above in January 2017, reports say.

But things seem to go further beyond. Although compliance with the agreement has reached 150pc, yet there is no end in sight to the output cut arrangement.

All this may bring in the much-needed cash flow at this stage, yet would be harmful to the industry in the longer run. “In 1996, I thought $20 a barrel was reasonable; in 2006 I thought $27 a barrel was reasonable and now it is around $100 a barrel. I told them again it is reasonable,” said former Saudi oil minister Ali Al Naimi in 2013. However, Naimi later regretted that, admitting, “However fair $100 per barrel had been, it had been a mistake.”

“It was very high,” he said in his 2016 autobiography. “That price unleashed a wave of investment around the world into what had previously been uneconomic oilfields.” And Naimi had a point. The plunge in the following years took prices all the way back to $27 by February 2016.

Crude prices are again touching the red zone, some argue. Russian energy minister Alex­ander Novak believes oil prices could reach $80 a barrel, although such a price would not be justified by market fundamentals, but by geopolitical concerns. There are reasons for this ‘controlled optimism’. At $100 a barrel, Brent demand growth would be seriously affected. The uptick in oil prices could lead to a slight drop in demand, Total CEO Patrick Pouyanne warned recently.

This is especially true when production outside the Opec continues to climb. Already the current price levels are unleashing additional and consistent output growth from the US shale fields. The Permian Basin has long been touted as the fastest growing shale play in the United States, but now its oil-producing prowess is being highlighted again as the Energy Information Adminis­tration forecasts; the prolific basin’s May production to be 3.183m bpd — an expected 73,000 bpd rise from April. The Permian play may very well, as Bloomberg Markets suggests, become the largest oil patch in the world over the next decade.

US producers are pumping almost 10.54m bpd. This is more than a million bpd higher than production at the start of the year. In other words, US producers have expanded their production by more than a million bpd in less than four months. At this rate of growth, it’s not hard for one to imagine where US production could be in another quarter. Consequent to all this, the United States is now selling more than 2m bpd of crude overseas and this may soon be the new normal.

Naimi’s fear had a basis. In the lust of short-term gains, Riyadh seems to be overlooking its long-term goals and objectives.

Published in Dawn, April 29th, 2018