As the price of WTI Crude Oil hits 2.5-year high prices near $70, what is behind this rise, and how much further can it go?
It would be very easy to assume that the global consumer ecosystem had taken a trip back to the 1970s when looking at the volatility of crude oil over the past few months.
Between March last year and now, crude oil has been the subject of more market volatility than most other tradeable commodities at the highest level since the dark days of the fuel crises in the 1970s which brought us monstrosities such as the 55-mph speed limit, the AMC Pacer and the four-cylinder Ford Mustang.
2020s vs 1970s
A quick study of the price chart may well show similar sharp up and down trends, but the cause is slightly different these days.
In the 1970s, it was geopolitical. The OPEC countries using a curtailed fuel supply to attempt to coerce their Western enemies during times of war into submission, whilst the Western nations continued to fight what they considered either communism or tyranny depending on which OPEC state was involved.
In response, the oil-rich nations created a situation in which the average consumer, whose entire economic and domestic lifestyle ran on fossil fuel, would be made to beg for their fuel via a state-imposed rationing system.
Today, things are somewhat different. Modern houses carry the 'eco' tagline on their advertisements, there is an endless momentum in the appetite for electric vehicles. In the United Kingdom in May alone, new car registrations rose an astonishing 673% over May 2020, with 13% of the new cars registered being either fully electric or plug-in hybrid.
I have a plug-in hybrid myself. It is a full size, three-ton SUV and if driven on pure electric mode, it does 250 miles per gallon. I have only filled it with unleaded fuel once since I purchased it. Just 10 years ago, a similar vehicle would have chewed fossil fuel at an alarming rate of 15 miles per gallon.
Why, if the world is going sustainable, and moving away from fossil fuels, is the price of oil continually moving, and rising for that matter?
Why is Crude Oil Rising?
Goldman Sachs made a prediction a week ago that the price of Brent Crude would rise to $80 per barrel this year, which seemed preposterous at the time. However, at the end of last week, it closed at $75 per barrel, so perhaps Goldman Sachs’ seemingly wild prediction was not so far off the mark.
Another anomaly is that the supply of oil has increased, yet the value has also increased despite fossil fuel use being the bête noire of almost every Western government.
The United States remains the third highest consumer of oil worldwide, even though it is also a world leader in clean energy source development. As the lockdowns have mostly come to an end across the United States, commuting to work is back to its normal level, however only 1% of all cars used for commuting are electric. Many cars are over 5 years old and therefore the daily journey to work is very much fossil fuel dependent.
Crude Oil Supply Increase and a Russian Forecast
One of the reasons for increased supply is that the US government has begun to consider the relaxation of some of the sanctions it imposes on Iran, however this extra supply has not equated to an increased and unused stock.
Russia, a nation whose national economy is utterly dependent on oil production has gone even further, with its government predicting a $200 per barrel price soon, which appears to be very much pie in the sky.
Russian Deputy Prime Minister Alexander Novak addressed the much-anticipated decision-making at the upcoming OPEC+ conference set for August and the expectation that it will decide to raise output significantly beyond the current pandemic-induced strategy of gradually releasing more barrels into a strengthening oil market.
Mr Novak stated on Thursday last week at the St Petersburg International Economic Forum that while it remains "premature" to talk about output decisions for August, he affirmed "The current oil price is good enough for Russia."
He said that "Oil prices reflect the balance of supply and demand," and noted it is expected the seasonal oil demand will increase in the third quarter of 2021. On Wednesday Brent crude futures touched their highest price since September 2019 at $71.99, with the international benchmark gaining 1.6%, following the day prior the benchmark seeing a rise of almost 3%.
Perhaps his most eyebrow-raising prediction at that meeting was that the proposals being pushed by the IEA could lead to $200 a barrel oil.
If the world were to follow the International Energy Agency’s controversial road map, which said investment in new fields would have to stop immediately to achieve net-zero carbon emissions by 2050, "the price for oil will go to, what, $200? Gas prices will skyrocket," said Mr Novak.
Of course, Russia's government has a strong interest in making sure oil remains a valuable commodity in global business and society, which is why you will never see an electric car charging point anywhere in Russia.
Perhaps this appears old news, but India and parts of Southeast Asia have been using record amounts of oil over the past few months, contributing to a high level of global demand.
It is also a highly industrious region hence much fuel is required for all purposes.
Whilst the blue waters and clear skies of the clean energy advertising campaigns permeate the paperless billboards of the West, oil is still well and truly in high demand and high usage, therefore remains one of the world's most demanded commodities.
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