Oil prices surged to around $57 a barrel yesterday for the first time in about a year and a half. The oil price is up about 20% since OPEC struck a deal two weeks ago on cutting output and now non-OPEC members have agreed on cuts.
Job Langbroek, a resource analyst with Davy, pointed out that oil prices were as high as $140 a barrel in 2008 before falling to close to $25 earlier this year. "It was a complete oversupply scenario. It was partly due to several years of high prices which allowed high cost projects to be developed. That led to a surge in supply. The US fracking industry increased output significantly and rapidly over several years," he explained.
The fracking revolution played a significant part in the oil price story in recent years. "US production would have been declining and then, over three or four years, an industry which had high costs was suddenly growing very rapidly and produced 5% of global output at one point. OPEC said in 2008 that enough was enough. They said they were the lowest cost producers and were not going to subsidise the highest cost producers. All restraints were taken off and they started to compete aggressively," he said.
To a certain extent, it worked. The oil price dropped and US production fell from 5.5 million barrels to around 4.5 million barrels a day. "However, it's fair to say that it hasn't worked as well as they'd hoped. A culmination of factors, including fiscal deficits, brought OPEC back to the table and they hammered out the bones of a deal and we're seeing the results of that now."
Job Langbroek said it is likely oil will trade in the range of $50 to $60 a barrel in the short to medium term, providing that OPEC discipline is maintained. "If it goes too high too soon, you'll attract the frackers back in. The higher the price goes, you'll induce additional supply. We would see a spike at some point in the next three to four years as under-investment on the supply side tightens markets seriously," he concluded.
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MORNING BRIEFS - The Japanese brewing giant Asahi has agreed to pay €7.3 billion for the eastern European brands of SABMiller. Both SAB and AB InBev are in the process of divesting brands as they undergo a £71 billion mega-merger.
*** The US Federal Reserve starts its two day policy meeting today which will culminate in an announcement by its chair Janet Yellen tomorrow night. It is seen as a racing certainty at this stage that the Fed will raise interest rates, although it has the capacity to surprise. The Fed has not increased rates since this time last year when it lifted them from an upper limit of 0.25% to 0.5%. The anticipation of a rate rise sent the interest rate payable on 10 year US government bonds to over 2.5% for the first time since 2014.
*** Independent News and Media has said it is not reneging on an agreement struck three years ago with the trustees of its defined benefit pension scheme. In a statement, INM denied that the restructuring of its pension arrangements is for the purpose of paying a dividend to shareholders. Two weeks ago, the company informed the trustees of its defined benefit schemes that it was ceasing contributions - resulting in an estimated loss of pension benefits of up to 30%. Staff had already lost 40% of their expected benefits under a ten year restructuring plan in 2013. The trustees are due to meet the Pensions Authority today.
*** The pound saw solid gains on currency markets yesterday after Chancellor Philip Hammond suggested that some interim transitional arrangements might be put in place to smooth the path for Britain out of the EU.
