Oil price spurts up

Oil price spurts up

16 March 2021Reading time: 3 minutes

In early 2020, the oil price came under pressure due to an oil dispute between Russia and Saudi Arabia. The conflict prompted Saudi Arabia to significantly increase production and lower the prices of its oil. Subsequently, the corona virus spread worldwide in march that same year, causing the demand for oil to drop sharply.

To support the oil price, the oil cartel OPEC and its allies announced last year to limit oil production. These production restrictions are still maintained. At the beginning of March this year, the major oil-producing countries decided to limit their production even longer, which came as a surprise to many market analysts and led to a significant rise in the oil price. This upward movement was boosted after Yemeni rebels launched multiple drone attacks on various oil installations in Saudi Arabia.

Due to these developments, the price for a barrel of Brent oil on Monday, March 8, 2021 was above USD 71. This level was last reached in May 2019. The price for a barrel of WTI oil on that same day was USD 67.93, the highest level since October 2018.

Shortage lurking

Two significant oil price declines over the past ten years have resulted in less investment in exploration and research into new oil wells. According to oil companies, this could lead to a major shortage. For example, oil company Total expects that the world will need 10 million more oil barrels per day in five years than is currently the case. In addition, the American Petroleum Institute stated that less investments and a natural drop in supply might lead to an oil shortage next year. Thanks to global vaccination programs, lockdown measures may be gradually phased out, which could potentially stimulate the oil demand.

At the same time, it remains to be seen what impact the transition to sustainable energy sources will have on the demand for oil. If the oil price remains high, this could possibly lead to a declining demand. A high oil price is unfavourable for oil-importing countries such as China and India. In addition, a higher oil price could create additional inflationary pressure on economies, as many goods and services become more expensive, which in turn can be detrimental to demand. The current oil price level may also cause other countries to increase production again. For example, an oil price of USD 60 a barrel is profitable for most US shale oil producers. The United States stands outside the OPEC+ oil agreement and is therefore not bound by the production restrictions.

The future price of oil is subject to several political, industrial and sector specific as well as economic factors. Investors should consider these risks when making their investment decisions. Developments can be different at any time than investors anticipated on, which could result in capital losses.

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27/11/2022 17:35:00