Will oil stay above US$60 per barrel?

BEFORE the meeting between Saudi Arabia and Russia to decide on the extension in the production cut of crude oil, the writing was already on the wall.

Russia, which is going for an election next year, needs oil prices to be higher for it to strengthen the rouble. Although producers in Russia are not keen on continuing with the cuts in production, they have little choice in the matter.

Malaysia is like Russia. Both countries have reduced the dependency on oil to fund the national budget. Oil revenue used to make up 30% of the national coffers of Malaysia. Now, it is a low double-digit figure.

When the federal government unveiled its Budget 2018, it estimated oil to be at US$52 per barrel next year.

Now that the Organisation of the Petroleum Exporting Countries (Opec) led by Saudi Arabia and non-Opec countries, led by Russia, have agreed to extend the production cuts until the end of 2018, the expectation is that the oil price will hover above US$60 per barrel.

If Brent crude stays above US$60 per barrel next year, then it would give the federal government more room to manage the country. It may even bring down the fiscal deficit faster than predicted.

But would oil be able to hover above US$60 for most of next year?

The shale oil and gas producers in the United States are not part of the pact between Opec and non-Opec countries. They have the technology to produce oil at levels well below US$60 per barrel.

And the US is expected to be the largest producer of oil, surpassing Saudi Arabia in the next few years.

As long as the shale oil producers are able to keep pumping oil, there is nothing certain about oil staying above US$60 per barrel.