Oil price is more likely to fall than rise

Despite the crisis in the Straits of Hormuz, the oil price isn’t so far off a six-month low. I can think of at least four reasons why the oil price is not going to rise much higher.

Article updated: 23 July 2019 10:00am Author: Michael Baxter

Did you know that in the late 1910s, a famine in Iran was responsible for the death of between eight and ten million people? There is a view, furthermore a view which I believe is widely held in Iran, that the famine was caused by the British. I have no idea how much truth lies behind this claim, but that is not my point. In the UK, we have a very one sided view of our history, but this view is not shared by all countries. In Iran, this terrible event is not forgotten. And sometimes our sense of injustice can override economic considerations. Iran is not going to give way in the row with the British in the Straits of Hormuz in a hurry.

The UK, it turns out, is a fall guy for the Americans. Whether or not President Trump wants a war with Iran, if a war did breakout, his dream scenario would be one in which the US is seen to be coming to the aid of plucky Britain, like the country did 70 plus years ago.

The irony, of course, is that the UK disagreed with the US over its withdrawal from the Joint Comprehensive Plan of Action — the Iran Nuclear Deal. And when the US president claims it was the worse deal in history, because Iran was getting money for nothing, in fact Iran was actually getting access to its own money, that had been frozen.

But while China disobeys US sanctions, how very dare it, didn’t it know that the US rules the world? Uncle Sam’s patsy, the UK does its dirty work.

Yet, despite the crisis in the Straits, the oil market is far from being in dire straits.

In fact, as I write, Brent Crude oil is trading at $63.37 a barrel, against a six-month low of around $60 and a six-month high close to $75.

The oil price may rise a tad higher, but not by much. And here are four reasons, in ascending levels of importance.

  1. Libya. Back in the 1970s, oil production in Libya was around three million barrels a day. Under Ghaddafi, even as recently as 2012, production was at 1.6 million barrels a day, but with the Libyan civil war, production has plummeted. A victory by the Libyan National Army (LNA), led by general Haftar, who has the support of Egypt, the UAE and Saudi Arabia, could see oil production surge.

  2. Shale gas. Unlike traditional sources of oil and gas, shale gas and shale oil production can easily be turned up and down. Every time the oil price approaches $70, shale production rises, and the oil price falls.

  3. The global economy. The National Institute of Economic and Social Research have reduced their forecast for global GDP growth this year slightly to 3¼ per cent. It said: “This is likely to be, by a small margin, the slowest annual growth for a decade.” It added: “We expect output growth to show a slight pick-up in 2020 to 3½ per cent.” But actually, that forecast growth for 2020, only represents a modest pickup, the global economy is not strong.

  4. Risk of a trade war escalating, coupled with a hard Brexit hitting both the UK and EU economies, meaning global GDP growth may remain subdued for some time.

Other factors

Goldman Sachs has argued that the current global economic slowdown is temporary. If it is right, then maybe the oil price will rise.

Of course, if next’s years US election sees a Democrat victory, then providing a war has not already broken out, the odds of stability in the Straits of Hormuz increases, leading to a rise in global oil production.

But let me leave you with one thought: it’s hot. As both Europe and the US prepare for either record or near record high temperatures, the evidence for global warming (I want to stop calling it climate change as this is a misleading description) becomes hard to deny. The global economy has to be weaned off oil, its survival depends upon it.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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