Strong global economic growth and Saudi Arabia bringing a risk premium to oil prices could send Brent oil prices surging to $80 next year, more than 25 percent compared to current prices, according to economist Jim O’Neill, a former chairman of Goldman Sachs Asset Management.
At 11:59am EST on Monday, Brent Crude was down 0.79 percent at $63.01.
“While oil prices could be about $60 per barrel in November 2018, my guess is that they will have risen to about $80 per barrel in the meantime,” O’Neill wrote in Barron’s on Saturday.
Although the economist himself admits that predicting oil prices is a tough job at which he failed when he said in January 2015 that prices would not continue to fall, he now differs from most of the analysts who expect oil prices to be around $60 next year. O’Neill doesn’t believe that oil prices will stagnate for a year.
On the demand side, world economic growth has picked up this year “and is now probably growing at a rate of 4 percent or higher. With the exception of India and the United Kingdom, eight of the 10 largest economies are expanding at the same time,” O’Neill said.
Although many oil consuming countries try to lessen their dependence on oil, the transition won’t take place overnight, so the oil market is adjusting to stronger demand, the economist notes.
Looking at the supply side, events in Saudi Arabia are suddenly adding a premium to oil prices.
“The Saudi government has been implementing radical changes, both domestically and in its foreign policy, and its reasons for doing so are not entirely clear,” O’Neill writes.
In addition, the economist argues that the Brent spot price has now moved above the five-year forward price, which suggests that a trend change may be underway.
“For my part, I’m unsure, but I wouldn’t be surprised if it happened,” O’Neill says, referring to the trend change.
By Tsvetana Paraskova for Oilprice.com