Prices for crude oil have exceeded $50 a barrel for the first time in more than half a year, while many large oil companies increase their net debt in order to recover from recent low commodity prices.
Bloomberg reported that over the last year, the 15 largest Western oil companies’ net debt rose by around $97 billion, to reach a total of $383 billion. Oil prices had been falling drastically recently, reaching lows of $27 per barrel earlier this year. This led most major oil companies to have to cut costs wherever they could in order to stay afloat as revenues dropped. Shell, for example, recently announced that they will be cutting a further 2,200 jobs by the end of this year, bringing total job losses up to 2,500.
Oil prices have been making a relatively steady recovery over the past few months and, as of this week, prices for benchmark Brent Crude increased to $50.2 per barrel, the first time the $50 mark has hit since November 2015.
This latest boost in growth was driven by a weak dollar, as well as increased demand from the US, whose stocks of the commodity fell slightly faster than was expected over last week.
There is some doubt over how sustainable this latest boost is, but breaching the $50 mark is certainly a positive, at least psychologically, for the industry and, as some are arguing, for the wider economy.
Capital Economics chief global economist Julian Jessop said: “The recovery is, on balance, good news for the global economy and for equity prices. Prices in the 450-$60 range would be high enough to ease some of the pressure on producers, while still low enough to boost spending on other goods and services, while still low enough to boost spending on other goods and services.”
He did point out, however, that the boost will not be quite as welcomed by consumers, to whom increased prices will be passed down through petrol pumps. This could lead to slowdown in areas that rely largely on imports for oil.
“Higher oil prices are clearly better news for producers, or mixed producers/consumers such as the US, than they are for consumers” he said. “In particular, the rebound in oil prices will sap some of the momentum from the economic recoveries in the Eurozone and Japan.
Many still are raising questions about how long this upward movement will last, given that the factors that led to this latest jump are more temporary than those that led to prices falling in the first place, like massively boosted production from Russia and Opec nations.
Sebastien Marlier at the Economist Intelligence Unit raised his doubts.
He said: “Overall, demand growth is still lower than last year. Meanwhile, Saudi Arabia and Russia are still pumping at record levels and Iran has come back faster than many expected.”
Iran’s oil production has increased massively since the removal of economic sanctions at the beginning of this year.
Opec will be meeting in Vienna this week at the organisation’s biannual meeting, where all eyes will be on member states as they work out how to progress now that oil prices have, for the time being, returned to a slightly more workable level.
It is almost certain that there will be no cut in production announced, as some people have been calling for. Instead, as David Hufton at oil brokerage PVM said, the “uncertainties are more about whether the meeting will be acrimonious and whether the Saudis will talk about increasing production.”
A lot of scrutiny is currently being placed on the Saudis’ position in the oil industry, as the nation prepares to undergo a huge program of reforms including selling off part of the state-owned oil company Saudi Aramco in an IPO next year.
