Oil prices rally – but don’t celebrate just yet
Crude oil prices extended the market gains in Asia, the Middle East and several other global markets, as prices hit $40 a barrel on Tuesday, up from just above $34 a barrel in the beginning of March.
This rally lifts crude prices by more than 35 per cent from the lowest point they reached last February, when prices dropped to below $28.
Consequently, this price rally provides much-needed nourishment for the Middle East’s markets, especially those of Saudi Arabia and other oil-exporting countries in the Gulf region.
Bourses in the Gulf region rose sharply on Sunday and are continuing to witness gains throughout Monday. Both Saudi Arabia’s and Dubai’s indexes surged as well.
The overall positive sentiment resulting from this even eclipsed a worrying announcement from credit rating firm Moody’s last Friday, which decided to place several oil developing countries, including the UAE, to be reviewed for a downgrade in light of depressed oil prices.
No one specific action or announcement can be given credit for this surge, but a few events that have unfolded over the past few weeks could be factors.
One of these could be an agreement reached between producers Saudi Arabia and Russia, who decided to freeze oil production at January levels. While this decision has not yet been officially confirmed, the news is certainly impacting general sentiment.
Saudi Arabia, the world’s largest oil exporter, has even increased the official selling price of its light crude by 25 per cent per barrel, to be applied to April’s shipments going to Asia.
Meanwhile, the kingdom is applying a discount of $0.75 a barrel for the regional market, down from the $1 discount applied in March.
While observers see these actions as right steps on the path to recovery, solid concerns about the oversupply of oil still remain, casting a gloomy pall over the industry and the general global economy.
For instance, Iran, a major player that is reviving its business ties with the world after the lifting of economic sanctions, has refused to abide by the global oil freezes. In fact, the country is looking to further increase its output.
Morgan Stanley’s advisors, among others, have warned about another impending drop in prices.
The international firm forecasted “persistently low prices for crude well into 2017, and perhaps beyond,” in its latest research.
“Weaker-than-expected demand, higher-than-expected supply, rising inventories and increased hedging incentives all work to delay rebalancing and slow the rise in prices immediately thereafter,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley, commenting on the firm’s forecast.