Oil Prices Are Creating a Goldilocks Scenario for the Global Economy
Business + Economy

Oil Prices Are Creating a Goldilocks Scenario for the Global Economy

REUTERS/Sergei Karpukhin/File Photo

Oil prices hit a one-year high on Monday after Vladimir Putin said that Russia was ready to sign on to an OPEC deal to cap production. Then prices slipped Tuesday as the International Energy Agency reported that global oil supplies increased last month and skepticism set in over whether a deal to cut output would really be reached — or how effective it would be in raising prices.

"An agreement to cut production, while increasingly likely, remains premature given the high supply uncertainty in 2017 and would prove self-defeating if it were to target sustainably higher oil prices," Goldman Sachs analysts wrote in a Tuesday note.

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As the oil market staggers its way toward a new balance of supply and demand, Julian Jessop, chief global economist at Capital Economics, says we could end up in a “Goldilocks” scenario for the global economy. In a note to clients Tuesday, Jessop writes that his team expects oil prices to slip and finish the year back around $45 a barrel before recovering and climbing toward $60 by the end of 2017.

“The first point to stress is that the truly seismic shifts in oil prices are now behind us,” he writes. “Recall that prices averaged $100 or more from 2011 until the first half of 2014, before collapsing to the high $20s earlier this year. Prices then recovered to a range of around $40-50 over the summer. The latest OPEC-inspired rally has taken them out of this range, for now at least, but they are still relatively stable compared to the swings that had gone before.”

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More importantly, a price range of $45 to $60 a barrel could be just right for the world economy, Jessop argues. “This would be high enough to keep major producers afloat and justify renewed investment in the oil sector. However, prices in this range would still be well below the $100 plus that many (not us!) had argued was the ‘new normal’ a few years ago. Consumers should therefore find something to cheer too.”

Jessop’s bottom line: “These levels would still be low enough to support consumer spending on other goods and services, while high enough to ease the financial pressures on the most vulnerable producers, including many in emerging markets.”