Welcome truce

Oil price: When Mexico wanted protection against lower oil prices late last year, it bought a hedge locking in $70 a barrel. That gamble has paid off handsomely, garnering about $6.5bn of profits as oil tumbled as low as $35. Opec would like to make this kind of bet less profitable. It wants to keep the oil price close to $70 – not far from where it is today. 

Oil does not have an absolutely right value. There was no supply glut when the black stuff traded at $40 last year. Nor were there real supply constraints when the price surpassed $140 three years ago. But for now, most industry observers would probably agree with Ali al-Naimi. The Saudi Arabian oil minister says the current price is “good for everybody – consumers and producers”. Keeping the price steady will be the goal of Opec, which is meeting on Wednesday. Of course, when a large producer is happy with the price, it’s probably too high. The global oil industry could probably keep up adequate investment and production with oil at $50 or even $40. 

But after a year of breathtaking volatility, customers may be willing to pay more for the sake of stability. They have had that since May. Oil has traded in a relatively narrow $60-$75-a-barrel range. But the market has not been so much balanced as equally unbalanced in opposite directions. On one side is a weak economy, falling demand and bulging inventories. On the other are investors flush with funds looking for a home. The producers seem willing to do their part. In particular, Saudi Arabia takes its self-given responsibility as “swing producer” seriously. It has both increased its capacity and cut back on production. 

If the widely expected global recovery comes soon, demand should rise to match supply. And if the recovery is strong, there should be enough supply to meet demand. 

But the financial markets are another matter. Policymakers have not found a way to manage the shifting mix of fear, greed and monetary policy which determine asset prices. Unless the central bankers and governments do better, Opec will find it hard to provide more than a few months of price stability.