(Repeats to send to additional subscribers)
By John Kemp
LONDON Feb 1 Spot Brent prices are at
their highest level since October and almost $16 (16 percent)
above Saudi Arabia's theoretical target of around $100 per
"Current high oil prices are a major challenge ... for the
global economic recovery," the International Energy Agency's
chief economist Fatih Birol warned on Thursday.
Prices are within a couple of dollars of the level that last
summer prompted officials in Washington, London and Paris to
worry about the negative impact on their economies and make
preparations to release crude and refined products from
The global economy appears more robust than it was six or
twelve months ago, though the recovery remains uneven. U.S.
presidential and congressional elections are safely past. The
pressure on policymakers to be seen to do something about the
rising cost of gasoline and diesel is now much less.
Nonetheless, prices are rising on the expectation the global
recovery will continue, causing oil demand to increase and the
market to tighten further. Past experience shows prices will
carry on rising until there are clear signs they are starting to
push the economy into a renewed slowdown.
For the past two years, the critical price threshold has
been around $115-125 per barrel -- a zone the market has now
Saudi officials will blame speculators for the renewed rise.
In a narrow sense they are right. But the fundamental cause is
the kingdom's decision to slash production at the end of 2012.
The kingdom cut output and exports much too quickly and deeply.
By removing the threat of oversupply, the production cuts
removed much of the downside price risk, and encouraged
speculators to bet on further rises as the economy recovers and
in the event of an upsurge in violence in the Middle East.
Whether or not the kingdom intended it, aggressive
production cuts also signalled Saudi Arabia was comfortable with
oil prices around $110 per barrel, and would not oversupply the
market in a bid to force them down towards its oft-repeated
target of $100.
Saudi Arabia has more than 3 million barrels per day of
unused production capacity, according to its own estimates, and
can push prices lower at any time by discounting its crude to
sell more, build inventory and force the market into contango.
But speculators have concluded (correctly) the kingdom has
no intention of using its spare capacity to force prices lower
Isaac Newton's first law of motion applies to oil prices
(and most other commodity and asset markets):
Spot prices will continue on their current rising trajectory
until there are indications the recovery is stalling, or Saudi
Arabia signals it is ready to boost exports to force them lower.
(Editing by Keiron Henderson)