Oil prices have been fluctuating widely this summer. Such volatility adds to the uncertainty facing consumer and businesses and raises doubts about future oil prices.
Why do oil prices matter?
Energy costs have a direct impact on inflation. Recent drops in oil prices often translated into lower inflation expectations, undermining central banks’ massive efforts to reflate economies.
Conversely, should oil prices settle at much higher levels, it would act as an additional tax dampening activity.
What’s driving oil prices?
Drivers include the US dollar. A rising currency is pressuring oil down.
Demand for oil is a major driver. Energy consumption much depends on activity. Currently, world growth is lackluster and expected to stay so.
That’s why other drivers now take center stage. In particular, speculative positions and small changes in supply expectations.
For example, we trace last July fall to the unwinding of long speculative positions. The rebuilding of long positions combined with rumors that OPEC would consider capping production, caused the rebound.
What prospects for oil prices?
There is room for further speculation as the outlook for supply shifts. But in our view, any spike in prices should be temporary.
OPEC ‘s policy to regain market share from the US proved successful. US oil output is down 10% from a year ago and is expected to drift lower.
Prices back at 60 would translate into more US production. We think that OPEC is keen to safeguard its recent gains even at a cost.
However, not at any cost. That’s why OPEC appears willing to put a floor under oil prices. Keep in mind that to balance their budget, most OPEC countries need prices above fifty.
We maintain our medium-term target range of forty-five to fifty dollar per barrel.
