As I See It

Price is not yet right despite $50 oil

Terry portrait with tieThere were more woes for beleaguered Aberdeen last week as Shell axed 475 jobs in its city headquarters and an engineering firm slipped into administration, blaming the slump in orders from the oil industry.

Yet amid the gloom was a glimmer of light: the price of a barrel surged through $50 for the first time this year, raising hopes that a recovery is in sight.

The price is now 80% higher than the low point on 20 January when it sank to $27.50 a barrel, its lowest since 2003. At that time there were predictions that it could fall further, to perhaps $10, prices last seen more than 20 years ago.

So, why the resurgence in the price? And what does it imply for the Aberdeen economy?

There have been false alarms, notably the expectation that the Opec nations would agree to cut supply and that Iran and Russia were prepared to cut a deal. Failures to secure a deal have kept the lid on oil prices which began their steep descent from more than $100 a barrel in the summer of 2014.

Real shifts in supply and demand are now occurring. Falling production from US shale producers has contributed to a slow rebalancing and the Chinese economy has proved to be stronger than was feared at the turn of the year when concerns about a slowdown led to the turmoil in world stock markets. Indeed, China’s oil imports have risen 12% this year and consumption in India is rising.

On top of these economic factors, other issues are driving the price upwards, notably the increased militancy in Nigeria which has shut down production, and the wild fires in Canada which are said to have taken a million barrels a day out of production.

Those working in the North Sea sector will be crossing fingers that the upward pressure continues and the price rises to at least $60 at which point a number of projects become viable and investment may then resume.

But nothing is more predictable in the oil sector than unpredictability. Saudi Arabia continues to lock horns with Iran over the latter’s refusal to curb output and no one can say for sure what impact a vote by Britain to leave the European Union will have on commodity prices.





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