The oil price – Whither next?

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As a basic commodity, oil price movements are curious. After all, just over a year ago, the oil price peaked on the spot market at $147 per barrel. Yet, by the end of last year, the oil price had fallen below $40 per barrel, thereby - in theory at least – making a lot of world production uneconomic.

Clearly, the onset of the recession depressed oil prices as industrial demand plummeted worldwide. More recently, though, the oil price has rallied as the recession appears to have stabilized. 

Whilst leading oil producers operate on the basis of long-term contracts – with more stable prices than the volatile spot prices - there are ongoing concerns about the sustainability of the oil price.

For the international majors, such as ExxonMobil, BP and Shell, the recent plunge in the oil price has had a massive impact on their profitability. When oil prices were peaking, these companies were generating vast sums of cash: their latest results were far less buoyant.

Fluctuating oil prices also create real uncertainty for investment decisions. The Athabasca Tar Sands projects in Canada, in which Shell is a heavy investor, are a case in point; it is estimated that a price of at least $80 per barrel is needed to make these operations profitable.

Of course, OPEC (Organization of the Petroleum Exporting Countries) is key to future oil prices. This cartel currently embraces around 40% of world production, with its leading member, Saudi Arabia, being central to any decision to cut back output. Significantly, too, OPEC members account for c70% of total world reserves.

Looking forward, oil prices may settle within the range of $60-$80 per barrel – a level that is widely seen as being appropriate for both producers and consumers. Currently, the price per barrel – at c$70 – is at the centre of this range.