The oil price hit $74.4 a barrel yesterday, as international benchmark Brent crude rose to its highest level in three-and-a-half-years.
The uptick prompted US President Donald Trump to blast the Saudi Arabia-led oil cartel Opec via Twitter, accusing the group of keeping oil prices artificially high.
Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!
Trump’s campaign could be in vain, however, with the oil price looking set only to move higher.
On Wednesday, Reuters reported that Saudi Arabia would be happy to see the price of crude rise as high as $100 a barrel, ahead of the much-delayed initial public offering of its state oil company Aramco.
Opec, the intergovernmental organisation governing the worldwide oil market, meets today in the Saudi city of Jeddah. As the world’s number one oil exporter – and the country holding the largest amount of oil reserves – Saudi Arabia frequently calls the shots within the organisation. Over the past year, Saudi Arabia has strongly supported Opec measures to boost oil prices, moving away from more traditionally moderate policy.
Khalid al-Falih, Saudi Arabia’s energy minister, led Opec’s 1.8 million barrel-a-day supply reduction deal with Russia in November. This lifted the price of Brent crude from $40 in 2016 a barrel to more than $60 last year (in 2015, an Opec-created supply glut forced prices down to $27 a barrel). Today, Falih said that he believed the world economy had the “capacity” to absorb higher prices, suggesting that Saudi Arabia does not believe that prices shooting up to $100 a barrel will reduce consumption.
Before the start of an Opec meeting, Falih said:
Energy intensity as you know has declined significantly, most economies are taking much less energy to generate GDP as they did 20 or 30 years ago. So this reduced energy intensity and higher productivity globally…leads me to think there is the capacity to absorb higher prices.
Global crude prices have also been pushed up this week by a sudden drop in US oil inventories (which is notable since increased production from US shale companies is one of the largest threats to Opec’s strategy to restrict supply) as well as concerns over Middle Eastern supply after air strikes on Syria.
Saudi Arabia has several reasons for wanting them to go up even more and it seems set to continue restricting supply in order to achieve this. Prices at $100 a barrel will greatly increase the valuation of Aramco, which the Kingdom is planning to sell a minority share of. After Aramco’s IPO, Riyadh still needs the money from high oil prices to fund initiatives like Vision 2030, Crown Prince Mohammed bin Salman’s ambitious economic reform plan. The need for funds to finance the war in Yemen is also thought to be a factor.
Jumps in oil prices often make other commodities more volatile. After Brent crude climbed past $74, and talk of $100 a barrel continued, nickel and aluminium jumped 10% and 8% respectively, before losing all their gains.