Voltatility in the oil markets still persists


Weekly oil price - August 2021

Crude oil price behaved like the movements of a ping-pong ball that hit a wooden floor, having fallen from a moderate height, during the past week – and the two weeks before it; there were endless peaks and troughs on the screens of traders and investors that result in nothing, when subjected to complex, state-of-the-art, modern data-crunching.

To put it simply, without a reliable way to quantify the market sentiments and the related political developments, it is next to impossible to infer any conclusions from rapid fluctuations in price movements.

The prices became fairly steady on Friday with WTI and Brent reaching $68.44 and $70.59 respectively.

Throughout the week, the factors that usually determine the price of crude oil were well at play: the US crude stocks, an anticipated decline in demand in light of the spread of the Delta variant; tension in the Middle East involving Iran, to name but a few.

On Wednesday, however, an additional factor came into play. The White House directly intervened by demanding that the OPEC increases its output; it came as a shock, as the policies of the Biden administration are in line with those who talk of turning their back on fossil fuels.

It is important to note that OPEC+ has already agreed to increase its daily output by 400,000 bpd for the period from August to December.

Although the group has not publicly commented on the request, ignoring the US request outright is highly unlikely; the development may have left the individual members in an uncomfortable lurch, especially at a time when there are clear indications for a decline in demand.

In its latest forecast, the OPEC, however, was upbeat about the growth in demand, both for this year and the next year.

If the group is forced to increase the daily output beyond its current level by influential political manoeuvres, the individual members, however, will be forced to increase the price of crude oil in order to compensate for the losses suffered due to inevitable decline in price.

Saudi Arabia has resorted to this move, not just once, but twice, in a short period of time for Asia, its main customer base.

At a time when the countries in question suffer economically due to Covid-19, it came as a bolt from the blue for the region. As a partial solution to the challenge, some countries started commercialising the crude oil reserves to cushion the impact of rise in oil price.

India, China, South Korea and even Japan have taken steps to deal with rise in crude oil price this way. Since the countries that are the members of the IEA, International Energy Agency, are supposed keep just 90-days-of imports of the previous years in petroleum reserves, the move is going be more of a psychological victory than that of an economic one.

Although the US added its voice to get the OPEC output lifted, the other major importers have been doing the same through diplomatic channels, but to no avail.

When India, for instance, made such a move in April, the Indian minister in question was rebuked by his Saudi counterpart, Prince Abdulaziz bin Salman; he just told him to sell the oil from the reserves that India bought on the cheap, when the prices crashed last year.

Since the US is now at centre of the picture, analysts are keen to watch any collective move by the OPEC in response to the growing political pressure – in current uncertain times.




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