Producer’s dilemma

Daily Parse | Oil prices are at their highest levels in four years. Expanded production would change all that

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(Photo: Gazprom)

Kevin McGwin

As it became increasingly certain that Donald Trump was going to make good on his threat to scupper “the worst deal ever”*, otherwise known as the agreement between five Western states and Iran, limiting its nuclear programme, the price of oil passed $70 a barrel on Monday.

This was a price not seen in since 2014, and came as direct result of concerns that once Mr Trump pulled America out of the deal, it would again make it difficult for the world’s fifth-largest producer to sell its oil abroad.

On the surface, higher prices coupled with the sudden disappearance of a major player might seem an ideal situation for producers, as well as for hopeful oil provinces.

Yet Monday’s increase was just the latest step for rally that has seen the price of oil rise 15% so far this year, despite the return of Iran’s oil to the market. Stronger demand has helped, and if this were the only factor, producers would indeed face a situation that warranted higher production levels and expanded exploration.

This is not the case, say analysts. Instead, the most powerful factor forcing the price up has been a definitive end to a glut that began in 2014 and, by January 2016, had driven prices below $30 a barrel.

The tumble was brought on largely by expanded US shale production. The price rebound, though, comes despite America’s pumpjacks bobbing apace: by next year it is expected to become the world’s largest producer.

Instead Opec and Russia, a major producer that is not a part of the cartel, have shown unprecedented restraint in sticking by a 2017 agreement that aims to holding production down until excess supply dries up. That deal is set to stay in place until the end of this year, although Russia is said to be worried that supplies are dwindling too quickly, benefitting those who didn’t sign on to agreement. For those who did, failing to react will mean their deal quickly goes from good to worst.

*This should not be confused with Mr Trump’s “worst deal in history”, which is Nafta.

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