What’s behind the recent surge in oil prices?
Global oil prices briefly rose above $70 today, their highest levels since January 2020, as the recent market rally continued apace.
Although cooling later in the day, the spike saw prices hit peaks not seen since the US assassinated Iranian general Qassim Soleimani at the beginning of last year.
And once again, it was security issues in the Middle East that provided the burst of energy that sent prices jumping over the $70 hurdle.
This morning Yemen’s Houthi rebel forces fired missiles at oil production facilities in Saudi Arabia, sending prices up over fears of supply security.
Rystad Energy’s oil markets analyst Louise Dickson said that although no production was taken offline, the attacks could add to the already-bullish market mood.
“The heating up of what’s commonly understood as a proxy war between Iran and Saudi Arabia in Yemen is just adding to the bullish oil price fever, as no one knows if any escalation is following”, she said.
But today’s attacks were merely the cherry on the top of a perfect cocktail of market conditions for a surge in prices.
Last week oil producer alliance Opec agreed to extend its current production curbs through April, with Saudi Arabia bearing the brunt of the cuts in order to keep supply and demand in balance.
The decision was far more conservative than most had expected, and added to the already optimistic sentiment that the global vaccine rollout has engendered.
The quicker people are vaccinated, the quicker the world’s economies can start firing again – increasing the demand for oil and pushing prices up again.
Dickson said that if the rollout continues as it has started, the market would be able to maintain “healthy” prices even when producers start bringing more supply back.
Furthermore, the passing of a new US stimulus package worth $1.9 trillion has also increased optimism over further spending to kickstart the world’s largest economy.
“US demand for oil products is amongst the world’s largest and if indeed spending accelerates in industrial and social life, more oil will be needed, and the effect will be visible in oil balances”, Dickson added.
It helps, too, that the US shale industry – whose emergence in recent years was one of the leading factors in the general decline of oil prices – has yet to really get going again after the pandemic.
Given the circumstances, the Economist Intelligence Unit’s global economist Cailin Birch said that the EIU had hiked its price forecast from $59 to $65 for 2021.
However, she warned that the current optimism was overstated, and that she expected sentiment to stabilise in the coming months.
“Looking again at market fundamentals, the overall picture still isn’t terribly rosy for oil producers”, she said.
“Thus far, the recovery in oil demand has been almost entirely driven by Asia. We only expect the economic recovery in OECD markets to accelerate in the second half of 2021, as vaccination rates rise. This is likely to have driven the decision by OPEC+ to keep production volumes on hold.”