Every US or global recession in the past 50 years has been preceded by a doubling or more of oil prices. But not every doubling of oil prices has been followed by recession.
The average world oil price has more than doubled from US$27/bbl in February 2016 to about US$60/bbl today.
From 2011 to 2014, central banks treated high oil prices as a deflationary phenomenon and adopted monetary accommodation.
US$50/bbl or so is a natural ceiling for oil prices, as this price is high enough for US shale producers to boost output and increase their global market share.
This belief that prices would not rise much above US$50/bbl relied on the assumption that OPEC countries, and especially Saudi Arabia, had recognized that the world was ditching fossil fuels under pressure from technology and regulation.
Instead, Al Naimi stopped defending the monopoly regime of 2005-14 and instead defended Saudi’s market share
The idea was that Saudi should sell as much oil as possible while demand for fossil fuels remained fairly strong.
This deal, supported by a huge increase in financial long positions, has boosted prices from US$40/bbl to US$60/bbl.
So should we abandon the view that something around US$50/bbl is a long-term ceiling for oil prices?
One way to answer this question is to think why Riyadh ditched its post-2014 strategy of defending market share and accepting lower prices.
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I do not think that the oil can reach the $ 100 barrier again, at least in the short-medium term, although in fact if it can pass the $ 70, but currently the market is very unstable and there are many conditions that favor the rise, but also many others that favor the descent.
On the one hand, Saudi Arabia and Iran have their tension at maximum levels, there is even talk of a possible Israel-Saudi Arabia alliance, which is unheard of in its essence. It would be necessary to see the capacity of Saudi Arabia and Iran to reach an agreement, and this is only possible through Russian mediation, so the whole process is very delicate.
There is also the Venezuelan question, since the country is producing less oil than OPEC allows due to its inability to increase oil production. If Venezuela falls into a state of even greater crisis, the price can go down or up, depending on who controls the Venezuelan oil wells, which hold the largest world reserve.
In short, the price of oil can actually go up and pass the $ 70, but it can also go down to less than $ 50 and leaving Saudi Arabia deeply affected, is actually a very delicate market today.
I agree with you at 100%.. thank you for the great comment !
Take care
Really enjoyed the post. You provide very good detail and analysis along with a macro political view that I agree with. Look forward to more, will resteem.
It's encouraging that the U.S. has cut back on our dependence on foreign oil and has even become a energy exporter. That has removed us from some of this conflict and given us more leverage where we once were very vulnerable.
Thank you @diezeldiddy for taking the time to read it.
Take care!
the Islamic state also manages a lot of money with the oil business as I saw in a forum, good info quite complete