Oil Prices Hit 2015 High

Oil prices hit their highest level this year as they rose above $60 a barrel for the first time. This comes after falling to $45 last month, the lowest in nearly six years. Experts at the Bank of America Merrill Lynch estimate that this month we should expect to see average prices between $40 and $70 a barrel. This rise is somewhat due to industry cutting back on spending, which has had a knock-on effect on supplies. “A continued build in storage will likely further exacerbate near-term price volatility and keep pressing companies to make capital expenditure reduction decisions that will have long-lasting effects on production,” the Bank’s experts wrote.

Mark Carney, the governor of the Bank of England, said that oil prices remaining low were ‘unambiguously positive’ for the global economy and the UK. 

However, not everyone is convinced. It is debatable whether low oil costs are a positive, as we discussed in the pros & cons of plummeting oil prices and how will the falling cost of oil effect the renewable industry? Analysts at Moody’s said that in theory the fall in oil should boost economic output. This is because it reduces costs for businesses and consumers. But in their global reports, Moody’s estimates for growth among G20 countries was less than 3%.

Marie Diron, who wrote the report, said: “A range of factors will offset the windfall income gains from cheaper energy. In the euro area, the fall in oil prices takes place in an unfavourable economic climate, with high unemployment, low or negative inflation and resurgent political uncertainty in some countries.”

What is not sure however, is whether crude oil prices can maintain this slow but steady increase, as for the first time in years, supply is stronger than demand.

Oil suppliers are hoping that while businesses and customers take advantage of the relatively low prices, it will lead to a larger demand. This will then push up prices again.

Daniela Corsini, an analyst at Intesa Sanpaolo, said in a report: “During the last weeks, crude oil rebounded driven by improved market sentiment and by expectations that low prices will lead to lower supply growth in 2015.”

There is of course another possible scenario. Recent job cuts and reduction in business budgets might suggest that oil supplies may not be able to keep up with growing demand. The CEO of Royal Dutch Shell plc, Ben van Beurden was keen to point this out: “Seeing today's prices, supply will probably not keep pace with this growth. It may even decline, as prices are close to cash costs,” he said.

Contrary to Moody’s estimations, other traders were attributing the slight rise in oil prices to an unexpected increase in economic growth in the euro-zone. This took place in the final quarter of 2014.

Mr van Beurden did agree that if demand continues during this period of low prices, they could ‘stay low for longer’.