BackFive reasons why global oil prices have jumped to 3-year high
On Monday, oil prices rose over 2% with Brent crude up $1.70, or 2.1%, at $84.09 a barrel, its highest since October 2018
PremiumAs the global economy treads on nascent recovery from the deadly coronavirus pandemic, rising Oil prices are posing a threat to many large economies and the developing world.
On Monday, oil rose over 2% with Brent crude up $1.70, or 2.1%, at $84.09 a barrel, its highest since October 2018. US West Texas Intermediate (WTI) crude rose $2.08, or 2.6%, to $81.43 for its highest since late 2014.
Crude has gained more than 60% this year as the roll-out of Covid-19 vaccines lifted movement curbs and, subsequently, oil demand. An energy crisis is gripping major economies with no sign of easing even as major oil producers remain firm on restrained supplies.
So, why is oil market on a continuous boil?
- Prices have risen as more vaccinated populations are brought out of coronavirus lockdowns, supporting a revival in economic activity.
- At the same time, from Asia to Europe, the global commodity prices, including those used as fuel for power generation such as coal and gas, have also surged. In India, some states are experiencing electricity blackouts because of coal shortages. China's government, meanwhile, has ordered miners to ramp up coal production as power prices surge.
- This makes oil an attractive commodity for generating power and keep the economic activity steady, and thus the higher demand is pushing crude markets higher.
"Crude oil rallied to seven years high on strong fundamentals on higher demand with global power shortage and lower supply worries. Crude oil prices rallied on substitute demand from gas and coal consumers over rising prices," Tapan Patel- Senior Analyst (Commodities), HDFC securities.
"The recent surge in natural gas and coal prices globally has increased demand for crude oil to meet power demand. Crude oil prices are expected to trade up with resistance at $83 and support at $80 per barrel. MCX Crude oil October has support at ₹5,990, resistance at ₹6,180," Patel added.
For India, the rising crude oil prices are a worry for the Indian economy. Apart from higher fuel costs denting the fiscal discipline of Centre, rising oil could also pinch consumers. This will likely add more pressure on Central government to cut the taxes on fuel or subsidising the oil marketing companies (OMCs).
The climbing trend of oil prices is likely to continue in the short-term, say analysts. To meet the demand in the market, the OPEC and allies, together known as OPEC+, last week decided to maintain a steady and gradual increase in output.
While the OPEC+ have pledged to return more withheld supplies to market, the increase is unlikely to meet the rising demand in the industrial economies, especially with winter months ahead.
Meanwhile, the markets are looking at US as the energy secretary Jennifer Granholm has raised the prospect of releasing crude oil from the government’s strategic petroleum reserve. However, it is not going to come anytime soon
"The news from last week that the (US) Department of Energy is not planning to tap into strategic reserves for now is keeping the oil market tight and is supporting prices," said UBS analyst Giovanni Staunovo.
Drillers in the US are taking advantage of the increase in prices and added five new oil wells last week for the fifth straight weekly increase in oil and gas rigs.
"Depleting stocks, OPEC discipline and the ongoing energy crunch will provide solid price support in the next three months," said Tamas Varga, another oil analyst at London brokerage PVM Oil Associates.
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