Oil prices soared on Monday, rising over 2% with Brent crude touching $84.09 a barrel up by 2.1% or $1.70 a barrel. This is the highest it has touched since October 2018.
As the global economy recovers from the pandemic, surging oil prices are deterring the road to recovery for both developed as well as developing economies.
US West Texas Intermediate (WTI) crude also rose $2.08, or 2.6%, and hit $81.43 recording its highest since late 2014.
Crude has surged over 60% this year owing to the easing of restrictions that had been in place due to COVID-19. As the rollout rate of vaccines rose, so did the demand for oil. Although major oil producers have maintained restrained supplies, the energy crisis in major economies shows no signs of easing.
Oil prices have been increasing as the economy revives owing to the relaxing of lockdowns as an increasing number of people receive the vaccination. In addition to that, global commodity prices including fuel sources for power generation have been rising throughout Asia and Europe. Some Indian states have seen power outages due to coal shortages while the Chinese government has instructed miners to ramp up their coal production to meet the power needs in the country.
As a result, oil has become an attractive commodity to be used as an additional source for power generation and aid in stabilizing economic activity. This strengthening of oil demand is pushing crude prices even higher.
Senior Analyst (Commodities), HDFC securities Tapan Patel said, “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.”
Patel added, “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.”
Rising crude oil prices are worrisome for the Indian economy. In addition to increasing fuel prices denting the fiscal discipline of the Centre, rising oil prices will increase the burden on consumers. This will pressurize the central government to slash the taxes on fuel or subsidize the oil marketing companies (OMCs).
Analysts are of the view that oil prices will continue to rise in the short term. OPEC and allies, together known as OPEC+, last week made the decision to maintain a steady and gradual increase in output in order to meet the market demand.
Although OPEC+ has pledged to return withheld supplies to market, it seems unlikely that the increase would meet the rising demand in the industrial economies, especially during the upcoming months of winter.
Energy Secretary Jennifer Granholm has hinted that the US might be planning to release crude oil from the government’s strategic petroleum reserve.
UBS analyst Giovanni Staunovo said, “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.”
Drillers in the US are benefiting from the rising prices as they added five new oil wells last week for the fifth straight weekly increase in oil and gas rigs.
Oil analyst at London brokerage PVM Oil Associates Tamas Varga said, “Depleting stocks, OPEC discipline, and the ongoing energy crunch will provide solid price support in the next three months.”