- The situation may have improved, but it is still too early to plan for an end to low prices
Gulf News
Editorial
It would be a mistake for any business manager in the region, or any investor in Gulf economies, to read too much into the recent recovery of the oil price.
A bout of irrational exuberance seems to be building up as the oil price recovers from its recent lows to cross $40 (Dh147.12) a barrel, and optimists hope that $50 is within reach. But the underlying fundamentals indicate that the rally could well be reaching its limits as persistent oversupply and the prospect of new shale production must cap any potential price increase. The world is still awash in oil and reserves are at all-time highs.
What happened to boost the price is that United States oil production had fallen for six months because many American oil companies have put off their new drilling plans and many now predict an overall decline in US production in 2016.
This built a sense of optimism among oil traders, which was also boosted by supply stoppages in Iraq and Nigeria and a general sense of growing geopolitical unrest, all of which helped the oil price to rise.
This led many to pile back into stock markets in the Gulf on the understanding that higher oil prices would lead to a recovery for the regional economies. But these investors are reading too much into the recent gains and they have exaggerated hopes of the upcoming meeting of oil producers expected to stabilise or reduce production. The situation may be better than when oil was selling for $30 a barrel, but it is far too early to plan on an end to oil’s low prices.
