November 20, 2017, 1:31

Oil Price Spike Over Saudi Corruption Purge Short-Lived, May Increase US Output

Oil Price Spike Over Saudi Corruption Purge Short-Lived, May Increase US Output

Several economic analysts and a UK-based economic research consultancy have commented on the oil market situation amid the ongoing anti-corruption probe in Saudi Arabia, which tops the list of oil-extraction countries.

MOSCOW (Sputnik) — An increase in oil prices due to the anti-corruption probe and related arrests in Saudi Arabia is unlikely to hold for a very long time, but if it does, it may cause a boost in production of US shale oil that will subsequently put a cap on oil prices, experts have told Sputnik.

A number of former and current Saudi officials, including 11 princes and four incumbent ministers, were detained by authorities over the weekend as part of an anti-corruption operation launched by the government, resulting in an increase of oil prices to their highest levels in over two years.

Brent Crude jumped to $64.27 on Monday but has already fallen to $63.97. WTI Crude Oil was at $57.35 on Monday and dropped to $57.24 on Tuesday. Both Brent and WTI prices haven’t traded this high since May-June 2015.

Further Oil Price Increase Possible, But Unlikely

Xiaoyi Mu, a senior lecturer in Energy Economics at the University of Dundee, suggested that oil prices might soar if there was further instability in Saudi Arabia, but the likelihood of that is low, and even if it does it would lead to a boost in US shale oil production.

“If the uncertainty in Saudi Arabia further escalates, oil prices might rise toward $70 per barrel. But as things currently stand, the probability [of that] is low. Even if it rises temporarily above $70 perbarrel, it is unlikely to be sustained for a long period of time as the higher the price will increase the production of US shale oil, which will effectively put a cap on oil prices,” Mu said.

Shale oil is a type of crude oil usually found in shale and limestone rock deposits and extracted through hydraulic fracturing.

Slide Back

“The upshot is that as concerns about geopolitical tensions fade, oil prices are likely to give back most of their recent gains. Indeed, even though the spot price has jumped, longer-dated futures are lower than they were last week, reflecting concerns that higher prices now will encourage more supply in the future,” Capital Economics, a UK-based economic research consultancy, believes.

According to Capital Economics, it is confident about its year-end forecast of $57 per barrel for Brent.

However, Adi Imsirovic, a teaching fellow in Economics at Surrey Energy Economics Centre (SEEC), argued that the new developments in the Middle East could create market risks and drive up oil prices in the future.

“Saudi leadership is pushing for change. There will be a lot of resistance to change. This is the source of market risk. Proposed changes are all positive from an economic point of view,” Imsirovic said.

Long-Term Implications

“Whilst the move [arrests of prominent Saudi figures] risks dealing a short-lived blow to the economy and could build opposition towards the Crown Prince within the royal family, business elite and religious establishment, we doubt that there will be any change in the Kingdom’s oil policy,” according to Capital Economics.

The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers will meet in Vienna on November 30 to discuss oil output cuts agreed on in 2016. The potential further increase in oil price, buoyed by the situation in Saudi Arabia, may influence the upcoming negotiations but is unlikely to tank the deal.

“It would be more difficult for the member countries to comply with the agreement because the cost of restricting production would higher. But I think as things stand, they will be able to reach an agreement in the November meeting,” the senior lecturer in Energy Economics, Xiaoyi Mu,has concluded.

Riyadh has been one of the driving forces behind the 2016 agreement, intended to overcome the global oil glut.

Sourse: sputniknews.com

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