Brent and WTI prices have been rocketing in recent weeks and this has attracted a lot of attention from investors globally. Price rise of more than 75 per cent since November 2020 has been on account of major economies reopening and vaccinating their populations after the pandemic shut down factories and grounded planes in March 2020.
This has been a boon for exporters of oil and this flood of cash is a relief for energy behemoths like Saudi Arabia and Russia, two of the top producers in the global energy market. Although the rising oil prices are boon for exporters, the importing countries are feeling the heat with growth still lagging when compared to the pre-pandemic era and high oil prices are pinching the end consumers in the form of higher inflation.
Demand optimism boils oil
The recent meeting of OPEC producers held on 4 March 2021 opted to increase the production by a meagre 1,50,000 bpd in April instead of market expectations of 1.5 million barrels per day. This clearly signals that the group wants the oil prices to be on the higher side. On the contrary, the demand side boost and optimism is a reason for the strength and the continued momentum in oil prices. Investors have been pumping funds into commodities such as oil on expectations of a demand recovery in the second half of the year as the global economy grows, while a wider rollout of vaccines against the Covid-19 pandemic allows more people to travel this summer.
US leads the way in increasing demand
According to data from the US Energy Information Administration released on 10 March, the US East Coast crude inventories fell by 478,000 barrels to about 8.4 million barrels, the lowest on record. The East Coast gasoline inventories also fell by about 7.5 million barrels to 63.7 million barrels, the biggest decline since September 2016.
Moreover, the overall US gasoline stocks fell by 11.9 million barrels in the week to 231.6 million barrels, compared with expectations for a 3.5 million-barrel drop. The drop in product inventories clearly signals the rising demand from US consumers.
Note of caution: Are oil prices sustainable?
Although the producers and exporters are a happy lot, the importers are not and hence the recovery in the post-Covid era accompanied by high oil prices is a hindrance for the consumers of oil importing economies. Although the vaccination programmes have started globally, the fresh wave of virus and the increasing infections are leading to restrictions in travel, international and domestic.
High oil prices are always detrimental for aviation companies as they form a bigger chunk of the operating costs and the impact becomes more pronounced in a post pandemic world when the demand has not picked up adequately.
Higher oil prices have a Passover effect on all the sectors of the economy as all the connected industries right from automobiles to plastics to transportation to agriculture are all dependent on oil. Higher input costs further adds to higher inflationary scenarios in an era of low growth wherein economies are trying to recover from after effects of the pandemic.
We are of the view that oil prices should remain stable in the range of $55-65 per barrel wherein it will be a balancing act for both the producers as well as consumers of oil. Taking into consideration the recent gains in oil, and the state of the global economy, higher oil prices will hinder the growth and momentum across. Oil prices cannot sustain at higher prices and we expect correction in (brent and WTI) towards $65/bbl and $60 per barrel respectively. While
oil prices have also had the support of the depreciating rupee, prices might move lower towards the Rs 4200/bbl mark in a months’ time frame.
Prathamesh Mallya is AVP Research Non-Agri Commodities and Currencies, Angel Broking Ltd. Views are his own.